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 Financial Crisis at 10: Will We Ever Recover? by Regis Barnichon, Christian Matthes, and Alexander Ziegenbein (FRB SF)
A blog post fleshing out the argument that the drop in the trend of GDP growth following the global financial crisis was a permanent effect of the recession. [Link]
Beware of a Recessionary Bias Among Analysts by Tim Duy (Fed Watch)
Following some notably extreme data points this week, economist Tim Duy cautions against cherry-picking data, and instead advocates a more comprehensive analysis which yields very different conclusions. [Link]
Distressed Mergers And Acquisitions (Wachtell, Lipton, Rosen & Katz)
A very useful background on the area of distressed M&A, which investors may find useful as a piece of reference material or as an initial foray into the special situations space. [Link; 241 page PDF]
Why Banks Can’t Be a Bridge Over Troubled Markets by Paul J. Davies (WSJ)
Linking capital requirements to VaR calculations which raise the capital cost of inventorying securities during periods of high volatility could have negative side-effects down the line. [Link; paywall]
The NYPD’s new DNA dragnet: The department is collecting and storing genetic information, with virtually no rules to curb their use by Allison Lewis (NY Daily News)
DNA sampling by police is broadening, and the wide nets being cast by police is generally falling in areas least able to defend themselves from attacks on civil liberties. [Link]
Domineque Ray Died So the Death Penalty Could Live by Matt Ford (The New Republic)
In a shocking move this week condemned from across the political spectrum, the Supreme Court denied an Alabama death row inmate the right to have his imam present during his execution, disregarding basic questions about the state’s motivations and constitutional protections against state sanctioned religion. [Link]
California Governor Proposes Digital Dividend Aimed at Big Tech by Kartikay Mehrotra (Bloomberg)
In a major recent policy rollout, California Governor Gavin Newsom announced a new tax on large tech companies based in Silicon Valley. [Link; soft paywall, auto-playing video]
America’s Signature Mode of Transportation Is High-Cost Rail by Jacob Bacharach (Hmm Daily)
Newsom was in the news this week, radically scaling back plans for high speed rail in California. That raises a variety of questions related to the utterly ridiculous cost of any large infrastructure project in the United States. [Link]
APNewsBreak: Teach for America slammed over Oakland strike by Sally Ho (AP)
Successful NGO Teach for America suggested that corps members who do not cross picket lines during an Oakland teachers strike would be punished financially. [Link]
China’s Demographic Danger Grows as Births Fall Far Below Forecast by Liyan Qi and Fanfan Wang (WSJ)
Recent demographic data has shown that China is aging – and failing to reproduce – a t a drastically worse rate than had been previously estimated. [Link; paywall]
Taiwan insurers skirt restrictions to load up on dollar bonds by Edward White and Robin Wigglesworth (FT)
An explanation of the absolutely ludicrous Taiwanese insurance market, which depends on massive overseas bond holdings which are vulnerable to an appreciation of the Taiwan dollar. [Link; paywall]
The Case for a Significant German Stimulus Is Now Overwhelming by Brad W. Setser (Council on Foreign Relations)
With fiscal surpluses dating back to 2014, slowing growth, a surging household savings rate, and low debt levels, Germany is the poster-child for the sort of economy that ought to be engaging in fiscal stimulus. [Link]
For Boeing, juggling cash flow often means ‘another “Houdini moment”‘ by Dominic Gates (Chicago Tribune)
With contracts that give it enormous leeway to pull forward or push back cashflow, Boeing (BA) is able to play a delicate financial game and make its operations look healthier – or at the very least, more consistent – than they actually are. [Link]
How a Nasdaq Loophole Fueled One Stock’s Rise of 3,750% by Dave Michaels and Alexander Osipovich (WSJ)
A Nasdaq-listed firm with a massive stock of restricted shares is listed on the large market despite its dubious ability to meet listing requirements. [Link]
Exclusive: FBI investigating top Vitol executives in Americas – sources by Brad Brooks and Gary McWilliams (Reuters)
One of the largest players in the physical oil trading market has executives under investigation in connection to the massive bribery scandal still unfolding in Brazil. [Link]
The former Apple lawyer who was supposed to keep employees from insider trading has been charged with insider trading by Sara Salinas (CNBC)
Three different times during 2015 and 2016, the Apple employee responsible for keeping Apple compliant with securities law traded ahead of earnings. [Link]
Wealth concentration near ‘levels last seen during the Roaring Twenties,’ study finds by Christopher Ingraham (Seattle Times)
New research from UC Berkeley economist Gabriel Zucman suggests that the 400 richest Americans control more wealth than the bottom 60 percent of the distribution (150mm people), with that massive swathe of the population holding only 2.1% of total wealth. [Link]
Americans’ Confidence in Their Finances Keeps Growing by Jim Norman (Gallup)
The highest percentage of American population expects to be better off over the next year since 1998, with 69% of those Gallup surveyed optimistic. [Link]
Writer Sues Twitter Over Ban for Criticizing Transgender People by Georgia Wells (WSJ)
In a novel legal strategy, a Canadian writer is suing Twitter on competition grounds after being banned under the Twitter hateful conduct policy. [Link; paywall]
Machado and Harper haven’t signed because baseball teams are now run like Wall Street ‘quant funds’ by Michael Santoli (CNBC)
A very slow free agent signing season has led analysts to compare the behavior of MLB teams to quants that underweight high-flying and glamorous stocks that garner all the headlines. [Link]
Americans continue their march to low-tax states by Jonathan Williams (The Hill)
Williams argues that tax rates and low budget deficits are driving the movement of Americans from large population states to booming Sunbelt locales. [Link]
Electric truck start-up Rivian announces $700 million investment round led by Amazon by Robert Ferris and Paul A. Eisenstein (CNBC)
A small company aiming to fill a high-performance niche in the EV markets with a pickup truck and SUV got a big funding boost from Amazon this week. [Link]
Measuring Trump’s 2018 Trade Protection: Five Takeaways by Chad P. Bown and Eva (Yiwen) Zhang (PIIE)
In addition to the sheer size and scale of tariffs introduced by the Trump Administration, some products are being hit multiple times. [Link]
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Have a great weekend!
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. Below is a chart of the US Global Citi Economic Surprise Index which saw the largest one-day decline in the Citi Economic Surprise Index in over 13 years yesterday.
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The big headline around financial circles this week was the fact that after facing resistance from a minority of politicians and public figures, Amazon decided to pull the plug on its planned expansion into New York City. Whatever your individual views towards the deal, the fact is that most people in the New York City area and Long Island City, where the project was to be based, were in favor of the expansion plan. In that regard, Amazon’s decision to pull out was viewed as a negative for the city and sets a bad precedent for the future when other firms weigh expansions in the region.
It’s always disheartening when a project runs into resistance and fails to clear the finish line, so thankfully for bulls, the market didn’t pull an Amazon and pack up and quit when it too faced resistance heading into the week. While Small and Mid Caps were finally able to take out one of the prior highs from before the December swoon (red arrows), the S&P 500 and Nasdaq haven’t quite been able to clear that hurdle. In the case of the S&P 500, though, the 200-DMA is now in the rearview mirror, so it’s a start.
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Despite stocks finishing lower yesterday, all of the major US index ETFs have held onto their overbought levels and are looking to finish the week there. The greatest strength continues to come from small to mid-caps. Whereas recently mid-caps have done slightly better, this week’s price action has led small-caps to take the throne. The Micro-Cap ETF (IWC) has been the best of these ETFs headed into the end of the week rallying 2.86%. Other small-caps, the Core S&P Small Cap (IJR) and Russell 2000 (IWM) are not far behind these kinds of gains at 2.77% and 2.73% WoW, respectively. As we have repeatedly highlighted, large caps have continued to lag. In the last week, the Dow (DIA) and S&P 100 (OEF) have both ‘only’ gained 1.29% and 1.26%, respectively. Still, these are not losses so things are not that bad.
Granted, despite an impressive rally this year with each ETF hovering around a 10% or greater gain year-to-date, not a single member of this group has broken out of their downtrends (on a six-month time frame). While progress has been made in changing that, it will likely take a bit more time and work on the part of the bulls to see trends begin to change through our Trend Analyzer. These trends are evident in the charts. Shown below is a snapshot of the above ETFs in our Chart Scanner tool. Obviously, prices are trending down and to the right still, but price action has also more than broken out from the downtrend lines so these trends have very much had some positive developments. At the current overbought levels, there is likely to be some type of pullback that could restest these downtrend lines.
Let the record show that we are getting just as tired about typing subject lines related to Chinese trade talks as you are reading about them, but that’s the story once again this morning as trade officials from both China and the US have agreed to resume trade talks in DC next week. That has turned what was a modestly negative tone to a modestly positive one as we close out the week and head into the long holiday weekend. In economic data for the US, Import and Export Prices were both weaker than expected, but the Empire Manufacturing report slightly exceeded expectations. Read all about overnight events around the world and this morning’s news in today’s Morning Lineup.
Along with the strong gains so far in 2019, we have also seen very strong breadth. The chart below shows the 10-day A/D line for the S&P 500 over the last year, and while it has typically oscillated between gains and losses, it has been consistently positive now since early January. In fact, for 28 straight days now the 10-Day A/D line has been above +500, which is the longest streak in nearly three years (March 2016).
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Looking for deeper insight on markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin by examining the market’s impulsive reactions to headlines on the government shutdown. Amid shortages of the metal, we then look at the surge in palladium prices. Next, we put into perspective what Initial Jobless Claims’ 4 week moving average hitting a 52-week high means. We then provide a look at port traffic numbers which showed exports fall while imports rose. We finish by breaking down all of the reasons to have a degree of skepticism in regards to today’s brutal retail sales report.
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In this week’s Sector Snapshot we note extremely strong readings in the percentage of stocks trading above their 50-day moving averages, as shown in the chart below.
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Sentiment pulled back slightly this week but has maintained a fairly optimistic attitude as seen through the weekly AAII survey data. Bullish sentiment fell to 35.1% from a recent high of 39.87% last week. While that is below the historical average, it is well off of the lows of the past few months as markets sold off and is now sitting right in the middle of the range from 2018.
Bearish sentiment, on the other hand, remains at multi-month lows but picked up slightly this week. Pessimistic views rose to 25.07% from 22.78% last week. While these readings could seem concerningly low when looking at the past six months or so—meaning from a contrarian perspective it is due for a reversal—it is not necessarily a concern as it is only at a lower range than the indicator has been at for the better portion of the past few years.
Meanwhile, neutral sentiment has picked up significantly in the past few weeks. This week’s reading of 39.82% is the highest since late July of last year. It is also the fourth consecutive week of an uptick in this sentiment reading. Since the market bottomed on Christmas Eve, neutral sentiment has increasingly become the majority sentiment reading from investors. In other words, as the market has rallied, investors have been less polarized between bulls and bears as they had been during the late 2018 volatility. Rather, investors seem to be a tad more cautious of the markets and have low expectations of bigger movements in either direction. Depending on whether or not a contrarian stance to the indicator is taken, the survey’s recent results have indicated more investors are expecting markets to rally or maintain these levels than continue the sell-off from late 2018.
Cisco (CSCO) reported after the close yesterday and exceeded both EPS and revenue forecasts while reiterating forward guidance. In response, the stock initially gapped up 2.84% and kept going from their hitting multi-year highs in the process. Since those highs shortly after the open, the stock has fallen quite a bit intraday but is still well above yesterday’s close. In the past year, the $49 level has proven to be tough resistance for CSCO. On October 3 of last year, the stock ran all the way up to a multi-year high of $49.47 before falling alongside the rest of the market for the next month. Afterward, CSCO attempted to retest these levels but fell short just over $49 in early December; once again collapsing with the rest of the market and finding a bottom on Christmas Eve. Since then, the stock has seen a considerable rally.
With earnings acting as a catalyst, the stock has finally regained all of these losses in the last quarter of 2018 and is looking at a break out once again. Even if the stock does not close above the highs today, it is certainly showing potential. As shown in the chart below, over the past few years, it has usually taken around three tests of prior highs for the stock to break out further.
Every Thursday, Bespoke publishes its “Bespoke 50” list of top growth stocks in the Russell 3,000. Our “Bespoke 50” portfolio is made up of the 50 stocks that fit a proprietary growth screen that we created a number of years ago. Since inception in early 2012, the “Bespoke 50” has beaten the S&P 500 by 97.0 percentage points. Through today, the “Bespoke 50” is up 196.1% since inception versus the S&P 500’s gain of 99.1%. Always remember, though, that past performance is no guarantee of future returns.
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