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.
Why did long-term unemployment rise in June 2018? by Ernie Tedeschi (Medium)
Former Bespokecast guest and ISI researcher Ernie Tedeschi takes a look at the very unusual spike in the number of workers who are long-term unemployed in last months’ Employment Situation Report. [Link]
Chicago May Become Largest City In U.S. To Try Universal Basic Income by Zaid Jilani (The Intercept)
The controversial social support mechanism universal basic income is being considered in Chicago. While its effects on work incentive, general welfare, government budgets, and other dimensions is at best uncertain, this possible experiment may provide some more evidence as to its worth. [Link]
Chinese real estate, charted by Jamie Powell (FTAV)
A review of the sheer scale and potential risks of the Chinese real estate sector, which is rapidly shifting from a story of urbanization to pure speculation. [Link; registration required]
Notes on the Global Condition: The “Rise of China” – semi-regular scrapbook (2018 July) (Adam Tooze)
A sweeping picture of the advent of the Chinese economy, how it is managed, and the implications of its rapid, historically unprecedented ascent. [Link]
Even the cheapest homes are waiting for buyers (Bloomberg/Crain’s New York Business)
New York City real estate, especially Manhattan, is in the process of gearing down and in some cases significantly. That’s not just the high end either. [Link]
How dirty is Miami real estate? Secret home deals dried up when feds started watching by Nicholas Nehamas and Rene Rodriguez (Miami Herald)
After the federal government imposed a special disclosure review on Miami and Manhattan real estate markets in 2016, cash buys by shell companies collapsed to nothing. [Link]
Hate ETFs? Quants Say They Found Anomaly to Profit on Their Flows by Lu Wang (Bloomberg)
Taking the other side of passive ETF flows delivered factor returns 2x the size of any other factor tracked by Bloomberg, per new Deutsche Bank research. [Link; soft paywall]
Do Passive Investors Move Markets? They Can by Asjylyn Loder (WSJ)
New research from S&P suggests that the $6.9 trillion in passive funds (both exchange traded and mutual funds) can have a very significant impact on the performance of markets overall due to flows in and out. [Link; paywall]
Nike Says Its $250 Running Shoes Will Make You Run Much Faster. What if That’s Actually True? by Kevin Quealy and Josh Katz (NYT Upshot)
A new quantitative analysis by the Upshot team based on publicly available Strava data suggests that a new kind of running shoe sold by Nike delivers a 4% improvement in marathon times. [Link]
E.U. Fines Google $5.1 Billion in Android Antitrust Case by Adam Satariano and Jack Nicas (NYT)
The largest economic bloc on the planet has delivered a remarkable rebuke to Alphabet’s business practice in the mobile phone market, adding to another multi-billion fine last year related to Google’s practice of promoting its own services in business results. [Link; soft paywall]
How EEC membership drove Margaret Thatcher’s reforms by Nauro Campos and Fabrizio Coricelli (Voxeu)
Conventional wisdom claims that structural reforms to the UK economy in the 1980s helped the UK keep pace with continental economic growth. This new review of the literature and econometric study, however, finds European Economic Community (an EU precursor) membership was far more important. [Link]
Austrian State May Require Jews to Register to Buy Kosher Meat (Haaretz)
A far-right politician in the Austrian state of Lower Austria (the only member of his party involved in that government) responsible for animal welfare has proposed creating lists of Jews and Muslims. He claims the list will be insured to make sure that kosher or halal butchering practices are kept to a minimum, but the method is recalling despicable historical practices from the region during the rise of the Third Reich. [Link]
Alt-Right Troll To Father Killer: The Unraveling Of Lane Davis by Joseph Bernstein (BuzzFeed News)
The gruesome, depressing, and grim story of a leading voice of the online alt right who eventually murdered his father when his parents asked him to leave their home. [Link]
Coin-Operated Capitalism by Shaanan Cohney, David A. Hoffman, Jeremy Sklaroff, and David A. Wishnick (SSRN)
A comprehensive review of initial coin offering white papers and contracts, before comparing them to actual code. The results show a huge gap between protections claimed and what was actually offered in hard code, suggesting that in contrast to claims of “trustless” architecture, the ICO and larger crypto markets are actually highly reliant on trust. [Link]
BlackRock’s Fink Says Clients Have Zero Interest in Crypto by Erik Schatzker (Bloomberg)
The CEO of one of the world’s largest asset managers says that none of its massive array of clients has sought exposure to cryptocurrency. [Link; soft paywall, auto-playing video]
Bloomberg Launches a Twitter Feed Optimized for Trading (PR Newswire)
A new algorithmic trading product is being introduced by Bloomberg in order to more cleanly facilitate digestion of Twitter data. [Link]
Congratulations, Mr. President: Zuckerberg Secretly Called Trump After The Election by Ryan Mac and Charlie Warzel (BuzzFeed News)
In a revelation sure to stoke controversy for Facebook, internal documents show CEO Mark Zuckerberg calling President Trump to congratulate him on his victory. Given the size and importance of Trump’s Facebook ad buys, this might not be so surprising. [Link]
The incredibly frustrating reason there’s no Lyme disease vaccine by Brian Resnick (Vox)
Ever wondered why you can’t get a vaccine for the terrifying prospect of a tick-borne bout of Lyme disease? Here’s the backstory. [Link]
Potential DNA Damage from CRISPR “Seriously Underestimated,” Study Finds by Sharon Begley (Scientific American)
The extremely promising gene editing protocol CRISPR (which we’ve included links to in the past) may have disastrous consequences, potentially creating artificial cancer or similar cellular dysfunction. [Link]
Tesla Model 3 Critic Flips View, Sees Sedan Being Profitable by Tom Randall (Bloomberg)
While Munro & Associates’ initial teardown of Tesla Model 3s saw them as unprofitable and facing massive quality issues, newer teardowns have suggested ~30% gross margins. [Link; soft paywall, auto-playing video]
Plutonium went missing in San Antonio, but the government says nothing by Patrick Malone and R. Jeffrey Smith (My San Antonio/Center of Public Integrity)
Two Department of Energy employees retrieved a briefcase containing plutonium and cesium from San Antonio, Texas, but had the briefcase stolen from their car while they stayed at a hotel overnight. [Link]
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Have a great Sunday!
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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Heading into the July 4th holiday, US equities were in a bit of a funk with the S&P 500 down nearly 3% from its recent high in June. The July 4th holiday must have been just the rest the bulls needed, though, because since then the S&P 500 has gone on to make a higher high with eight daily gains in the eleven trading days since July 4th. So, which sectors have been behind the market’s recent strength? Leading the way higher has been Technology (what else is new?), which is up over 5%. Behind tech, though, Financials and Industrials have been noticeable outperformers while Consumer Discretionary is just barely outpacing the S&P 500. On the downside, four sectors are actually down during the S&P 500’s recent rally, with Telecom Services acting as the largest drag with a decline of 2.5%.
In terms of individual stock performance, gains have been pretty broad-based. For the Russell 3000, 64% of stocks in the index are positive since July 4th and the average stock is up 1.68%. In the S&P 500, however, performance has been even more positive with the average stock up 2.44% and three out of four stocks in the index posting gains. So, large caps have definitely been leading of late. In the tables below, we just wanted to quickly run through what have been some of the best and worst performing stocks since July 4th.
We’ll start with the Russell 3000. The table below lists the index’s 25 best performing components since the close on July 3rd. Looking at this list, there are three things worth highlighting. First, all of these stocks have had big gains in a short period of time. Second, most of them, you have probably never even heard of. Third, it’s been a good month for Drugs and Biotech. Of the 25 names listed below, eleven of them are either biotechs or pharma stocks. Another stock we wanted to point out was Turtle Beach (HEAR). Back on July 3rd, we highlighted this stock as the best performing stock in the Russell 3000 YTD as it had already returned 1,050%. Since that post, the stock has rallied another 27% taking its total YTD return to 1,400%. How’s that for compounding? Even more surprising is that even after a 14-bagger, the company’s market cap is less than $400 million.
Since you’ve probably never heard of most of the names above, in the table below we list the 25 best performing large-cap S&P 500 stocks since 7/3. These stocks haven’t seen quite as impressive gains as the stocks in the table above, but all of them are up over 8%, which isn’t bad for a little over two weeks. Topping this list with gains of more than 20% are CA and Biogen (BIIB), which were also both on the list above. behind these two, another ten stocks are up over 10%. With all the talk about how FANG is carrying the market lately, it is worth noting that the only one to make the list was Facebook (FB).
Finally, not to end on a bad note, but the stocks listed below are the 25 worst performing S&P 500 stocks since the July 4th holiday. As mentioned above, breadth for the stocks in the S&P 500 has been strong, so there haven’t been a whole lot of big losers. Of the 25 biggest dogs in the index, just two are down more than 10% (Broadcom-AVGO and L Brands-LB). The most notable stock listed, however, is Netflix (NFLX). After a run in 2018 where the stock more than doubled, NFLX’s weak earnings report on Monday, hit the stock hard. While NFLX did recover a bit of its initial weakness on Tuesday, it hasn’t been able to really catch its footing since.
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When looking to get a handle on the overall health of the market, many technicians like to pay attention to Transports and Small Caps, but judging by the relative strength charts of the Dow Jones Transports and Russell 2000 versus the S&P 500, the broader market hasn’t been quite as strong. First, in the case of the Dow Transports, the index hasn’t been much of an outperformer at any point in the last year. Over the last month, though, the Transports have been extremely weak and are currently near their lowest level on a relative basis at any point in the last year.
The performance of small caps versus the S&P 500 has been a lot stronger than the Transports, but even here, we’ve recently seen a bit of weakness in the group. From when the China tariffs were first announced earlier this year right up until mid to late June, the Russell 2000 was a steady outperformer. Over the last month, though, the Russell 2000 has been a laggard. Granted, the index got a bit ahead of itself in the run-up, but notwithstanding today’s bounce, for the last couple of weeks as the S&P 500 has been in rally mode, Transports and Small Caps have been left behind.
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Below is one of the many charts included in this week’s Sector Snapshot, which is a trading range chart of the S&P 500. While the index is currently overbought (in the red zone in the chart), it has been trending in a smooth uptrend of higher highs and higher lows ever since making its correction low at the start of April.
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S&P 500 sector weightings are important to monitor. Over the years when weightings have gotten extremely lopsided for one or two sectors, it hasn’t ended well. Below is a table showing S&P 500 sector weightings from the mid-1990s through 2016. In the early 1990s before the Dot Com bubble, the US economy was much more evenly weighted between manufacturing sectors and service sectors. Sector weightings were bunched together between 6% and 14% across the board. In 1990, Tech was tied for the smallest sector of the market at 6.3%, while Industrials was the largest at 14.7%. The spread between the largest and smallest sectors back then was just over 8 percentage points.
The Dot Com bubble completely blew up the balanced economy, and looking back you can clearly see how lopsided things had become. Once the Tech bubble burst, it was the Financial sector that began its charge towards dominance. The Financial sector’s sole purpose is to service the economy, so in our view you never want to see the Financial sector make up the largest portion of the economy. That was the case from 2002 to 2007, though, and we all know how that ended.
Unfortunately we’ve begun to see sector weightings get extremely out of whack once again.
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After a week where individual investor bullish sentiment saw its largest increase since the 2016 election, the bulls retreated this week. According to the weekly survey from AAII, bullish sentiment declined from 43.05% down to 34.66%, erasing just over half of the prior week’s increase. No matter how much individual investors want to like the market, they just can’t bring themselves to stay positive.
What’s really interesting about this week’s survey was that bearish sentiment also declined, falling from 29.15% down to 24.94%. With these declines, it was only the third time since 2009 that both bullish and bearish sentiment in the AAII survey fell four percentage points or more in the same week. The other two occurrences were in December 2011 and April 2015.
With both positive and negative sentiment dropping, all those bulls and bears got back on the fence. As shown in the chart below, neutral sentiment moved back up above 40%.
After just barely breaking an 18-month streak of readings above +20 last month, the Philadelphia Fed Manufacturing report rebounded more than expected in July, rising from 19.9 up to 25.7 compared to consensus forecasts for a reading of 21.5. With this month’s reading, the Philly Fed reading of General Business Conditions has now been above +10 for 20 months as well as in every month since the 2016 election. The only other period since 1980 where the index was above +10 for a longer period of time was in the 21-month stretch ending in April 2005.
In terms of the breadth of this month’s report, things were generally positive. Most components saw m/m gains with the biggest increases coming in Unfilled Orders, New Orders, and Prices Paid. The only three categories that saw declines were Number of Employees, Average Workweek, and Shipments.
In the case of Prices Paid, that index has been soaring of late. Its current level of 62.9 is the highest monthly reading we have seen in a decade, eclipsing the prior peak from February 2011. Going all the way back to 1980, there have only been nine months where the index was higher.