The Closer — BoC, 10s Cheap, Sector Vol & Spread, Energy Update — 4/18/18

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Looking for deeper insight on markets?  In tonight’s Closer sent to Bespoke Institutional clients, we recap the BoC decision today, review why ten year yields are excessively high, and recap this week’s EIA data and energy price action.

See today’s post-market Closer and everything else Bespoke publishes by starting a 14-day free trial to Bespoke Institutional today!

Who Said Words Can’t Hurt?

What if we told you that just when the Housing Bubble was beginning to unravel over a decade ago and the majority of Wall Street brokerage firms would face insolvency as a result of the all the toxic debt they had on their books, that there was one firm that had the foresight to not only avoid the bad debts but to take the other side of Wall Street’s bets?  Clearly, one would assume that the stock of this company would not only have been a good investment relative to its peers but to the broader market as well.  Well, that hasn’t exactly been the case.  The stock we are talking about is Goldman Sachs (GS).

While Goldman was celebrated for years for having avoided the Housing Bubble and claiming that they didn’t even want to be part of the government bailout of the financial sector, the long-run performance of its stock has not been nearly as good as one would expect.  The first chart below shows the relative strength of the stock versus the S&P 500 Financial sector going back to the start of 2000.  When the line is rising, it indicates that GS is outperforming, while a falling line indicates that the stock is underperforming.  From the time of its IPO in late 1999 through the middle part of the following decade, shares of Goldman performed pretty much in line with the Financial sector and even lagged modestly.  Beginning in 2005, though, the stock’s fortunes turned, and Goldman became one of the sector’s leaders.  There was a period of volatility in its relative strength in late 2008, but then the stock really pulled ahead in late 2008 through early 2009 as the market recognized the company’s adeptness in avoiding the subprime crisis.  Goldman was now considered “the smartest firm on the street.”

Ever since the middle of 2009, though, Goldman has generally been a market laggard, erasing much of its outperformance from the Financial Crisis.  In fact, going all the way back to December 2007, the price of Goldman and the Financial sector as a whole have had nearly identical returns in terms of price.  While Goldman is down 10.1% since the start of December 2007, the S&P 500 Financial sector is down 9.8%.  In addition, of the current members of the S&P 500 Financial sector, 41 stocks have outperformed Goldman since the start of December 2007 compared to just 18 that have underperformed.  Granted, there’s a bit of survivorship bias here as companies like Lehman and others went under, but it does illustrate how Goldman has not been a leader of the sector over the last decade.

Relative to the S&P 500, it’s a similar story.  Outside of a brief period right after Lehman went under, Goldman outperformed the S&P 500 by a wide margin during and through the Financial Crisis.  That outperformance peaked in the late Summer of 2009, and ever since then, the stock has given up most of its outperformance.  Going back to the Summer of 2005, nearly 13 years ago, Goldman and the S&P 500 are both up 123% in terms of price.  In other words, the stock hasn’t generated any alpha during that span.

So what happened?  There are a number of factors behind the decline in Goldman, but one worth noting here can be summed up in two words – Matt Taibbi.  Just about everyone remembers back in July 2009, when Taibbi wrote a scathing article for Rolling Stone that referred to Goldman as the “great vampire squid.”  The article went on to accuse Goldman and its alumni of feeding all of the major bubbles throughout US history only to profit with taxpayer money once the bubbles burst.  Whether you agree with the article or not, it was a public relations nightmare for the company.  The media and the general public were looking for a scapegoat, and who better to blame than the company that actually profited from the crisis?

Looking again at the relative strength chart of Goldman Sachs versus the Financial sector and the S&P 500, it’s hard not to argue that the “Vampire Squid” article didn’t have an impact on the public’s perception of Goldman and ultimately its stock price.  While the Rolling Stone story wasn’t published exactly when Goldman’s relative strength peaked versus the Financial sector and the S&P 500, it preceded the peak, not by a matter of months, but more like a matter of weeks.

Getting back to the present, can you think of another super successful company that has recently become a scapegoat for the public’s uneasiness over privacy?  We’ll give you a hint: booster seats.

Earnings Reports See Initial Buying, Then Some Selling

Heading into today, stocks that have reported earnings this week have seen their share prices initially react positively to the news.  Using our Earnings Screener, below we show the 18 stocks that had reported earnings this week through yesterday morning.  The first column next to the stock ticker shows the amount that the stock gapped up or down at the first open of trading following its earnings report.  As you can see, 17 of 18 stocks have gapped up in reaction to their earnings reports.  On average, the gap up for these 18 stocks has been +2.22%.

Things look a little different from the open to close of trading, though.  In fact, 12 of the 18 stocks that have reported earnings have traded lower from the open to the close on their earnings reaction days, for an average open to close decline of 0.74%.

The trend is clear (although the sample size is relatively small).  So far, we’re seeing a very positive initial stock price reaction to earnings, but then selling has dominated the trading day.

Start a two-week free trial to Bespoke Institutional to use our Earnings Screener now.

Fixed Income Weekly – 4/18/18

Searching for ways to better understand the fixed income space or looking for actionable ideals in this asset class?  Bespoke’s Fixed Income Weekly provides an update on rates and credit every Wednesday.  We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week.  We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed income ETF performance, short-term interest rates including money market funds, and a trade idea.  We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1 year return profiles for a cross section of the fixed income world.

In this week’s note we focus on the rental yield implied by US Census estimates of county-level median home value and rental outlays.

Sample

Our Fixed Income Weekly helps investors stay on top of fixed income markets and gain new perspective on the developments in interest rates.  You can sign up for a Bespoke research trial below to see this week’s report and everything else Bespoke publishes free for the next two weeks!

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Bespoke’s Death By Amazon Index Continues To Slide

Yesterday we published an update to our Death By Amazon index, which captures the performance of stocks which we judge as exposed to the rise of Amazon: traditional retailers, without their own brands, or without a focus on e-commerce or a dedication to specialty products that Amazon does not focus on. We’ve maintained these indices since 2014, and they haven’t always lagged badly. As shown in the chart below, the equal-weight version of the index actually outperformed the S&P 1500 dramatically until early 2015. Since then, the stocks have really lagged. Late in 2017 the index was flat versus where it stood almost 5 years earlier! While it has rebounded a bit over the last few months, the performance gap versus the broad S&P 1500 is still huge.

More recently, we’ve also introduced an Amazon Survivors index. These stocks are retail still, but they have attributes which might help them resist the competition of the e-commerce giant: strong brand names they control, e-commerce focus, or a specialty product line where Amazon doesn’t compete (for instance, auto parts). Since inception, this index has outperformed our Death By Amazon index quite dramatically.

To see our most recent Death By Amazon report, which includes a list of the stocks that make up both the Death By Amazon and Amazon Survivors indices, you have to be a Bespoke Premium member or higher.  You can see the report now with a two-week free trial to Bespoke Premium.

Bespoke’s Global Macro Dashboard — 4/18/18

Bespoke’s Global Macro Dashboard is a high-level summary of 22 major economies from around the world.  For each country, we provide charts of local equity market prices, relative performance versus global equities, price to earnings ratios, dividend yields, economic growth, unemployment, retail sales and industrial production growth, inflation, money supply, spot FX performance versus the dollar, policy rate, and ten year local government bond yield interest rates.  The report is intended as a tool for both reference and idea generation.  It’s clients’ first stop for basic background info on how a given economy is performing, and what issues are driving the narrative for that economy.  The dashboard helps you get up to speed on and keep track of the basics for the most important economies around the world, informing starting points for further research and risk management.  It’s published weekly every Wednesday at the Bespoke Institutional membership level.

You can access our Global Macro Dashboard by starting a 14-day free trial to Bespoke Institutional now!

Netflix (NFLX) Pulls FANGs Along For the Ride

With a gain of over 9% on Tuesday after its strong earnings report on Monday afternoon, shares of Netflix (NFLX) are up an almost ridiculous 75% YTD, 13% in just the last week, and now over 13% above the 50-DMA.  The rally for NFLX has been so huge that its market cap is now just $8 billion below Disney (DIS).  Using our Trend Analyzer tool, we created a custom portfolio comprising the eleven stocks that make up the FANG+ index to see how the market’s favorite momentum stocks are trading relative to their trading ranges.  With its big gain on Tuesday, NFLX is currently the most overbought of the stocks in the group, but along with Booking (BKNG) and Apple (AAPL) it is one of just three stocks in the group trading at overbought levels right now.  The majority of the stocks in the group are currently trading in neutral territory and basically within +/-2% of their 50-DMAs.  The only oversold stock in the group is Tesla (TSLA), and it is also the only one that is down over the last week.  In terms of timing, though, TSLA actually has a Good rating along with Amazon.com (AMZN), NVIDIA (NVDA), and Twitter (TWTR).

Our Trend Analyzer tool lets you monitor trend and timing measures for all US stocks and major ETFs across asset classes.  It’s accessible via a Bespoke Premium or Bespoke Institutional membership.

Our Stock Seasonality Database is another useful tool that allows clients to see how various equity markets, asset classes, and individual stocks have historically performed over different time periods.  The table below shows how the stocks that make up the FANG+ index have historically performed in the period from the close on 4/17 through the remainder of April.  For each stock, we list its median percent change, the percentage of time the stock has traded higher, how frequently it outperforms the S&P 500, and then how it performed during this period in each individual year.

While TSLA is the FANG+ stock that has been the weakest performer lately, the tide may be ready to turn for the stock as the second half of April has actually been a good time of year with a median gain of 4.93% and positive returns 86% of the time.  Along with TSLA, shares of Facebook (FB), AMZN, and BKNG have all seen median gains of over 4%.  Just four of the FANG+ stocks have seen median returns that are negative, and of those, NFLX and Twitter (TWTR) are the only ones where the median decline is more than 1%.  TWTR has been an especially weak performer during this period since it has been public, but we would note that the sample size is relatively small at just four years.  Finally, 2017 was an especially good year for the FANG+ stocks as all eleven of them posted gains during the back half of April, with ten of them exceeding the 1.5% gain of the S&P 500.

Our Stock Seasonality Database tool lets you analyze the historical performance of all US stocks and major ETFs across asset classes over different user-defined time periods.  It’s accessible via a Bespoke Premium or Bespoke Institutional membership.

The Closer — Gap & Run, Residential Construction, Industrial Production — 4/17/18

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Looking for deeper insight on markets?  In tonight’s Closer sent to Bespoke Institutional clients, we review recent equity price action, rapid spread tightening in high yield bonds, still-slow bank lending, a very detailed review of residential construction activity, and finally a look at industrial production.

See today’s post-market Closer and everything else Bespoke publishes by starting a 14-day free trial to Bespoke Institutional today!

The Last Hour Finally Hangs On…By a Thread

We’ve been talking quite a lot recently about the equity market’s inability to hang on to gains in the last hour of trading.  Heading into today, the index had traded down in the last hour of trading for six straight sessions.  Today, equities were strong throughout the trading day and even started to leg higher just as we entered the final hour of trading.  It looked like the streak of selling was easily coming to an end, but the bears didn’t go down without a fight.  In the final half hour, equities started to give up some of their gains, and by the time the bell rang, the S&P 500 was up just barely in the last hour for a total gain of just 0.21 points!

While today’s last hour gain ended the six-day streak of selling, the trend of last hour selling remains in place.  For example, over the last 25 trading days, the S&P 500 has declined in the last hour of trading 18 times (72%), which is well above the historical average of 44% for all 25 trading day periods since 1983.  In case your curious, the record for most last hour declines over a 25-trading day period was in the Summer of 2015, when the 25-day total hit 21 a handful of times between late June and early July.  If you remember that period, the rest of the Summer wasn’t particularly enjoyable for bulls.

Housing Starts and Building Permits Boosted by Multi-Family

Data related to Housing Starts and Building Permits for the month of March came in stronger than expected earlier today.  Housing Starts for March came in at a seasonally-adjusted annualized rate of 1.319 mln compared to expectations for a rate of 1.267 mln, while Building Permits hit a rate of 1.354 mln, which was 33K greater than forecasts.  In the case of both data series, March’s readings were just shy of the current cycle’s highs, but still well in the hole compared to the peak run rate of over 2.2 mln during the last expansion.

While the headline data was strong in both reports, underneath the surface the trend wasn’t quite as positive.  The table below breaks down both reports by size of unit and region.  The key thing that sticks out in both reports is that single-family units actually declined on a m/m basis with a drop of 3.7% in Housing Starts and a decline of over 5% in Building Permits.  Multi-family unit starts and permits, however, were up by double-digit percentages.  On a regional basis, the Midwest was the strongest m/m in both starts and permits, while the Northeast was the only region to see a m/m drop in permits.  All in all, it would have been preferable to see a stronger showing from single-family units, but the longer term trend for housing remains solid.

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