🐂 Market Talk #5 🐂
(A Bitesize Recap for the Week to Come)
May 9th, 2021, Edition 5
Welcome to Market Talk, where we round up some of the interesting activity that took place in the public markets over the past week in a bitesize format.
Market Talk is released every Sunday and aims to give you the 411 for the week ahead.
If you wish to read this as a webpage, and not an email, then follow this link.
📈 Market Action 📉
Here are your quick updates from the past week for various asset classes.
The S&P 500
Sectoral ETFs for the US
🌎 Global Indices 🌎
Europe & UK
Africa & Middle-East
% Debt Markets %
10Y Government Notes
Global Yield Matrix
Global Yield Curve Matrix
🛢️ Commodities 🛢️
💷 Major Currencies 💷
FX rates are correct as of the time of publishing.
🔇 US Market Sentiment 🔇
Fear & Greed Index
The CCN Greed and Fear Index measures market sentiment based on seven factors; momentum, price strength, price breadth, put/call ratios, junk bond demand, volatility, and safe-haven demand.
The current reading stands at 55, just one notch below the reading of 56 reported on Friday of the previous week. This moves sentiment into the neutral zone, after a period of sequential, but gradual, declines.
The S&P 500 trades above the 125-day moving average by 9.68%, up from 9.2% in the week prior.
With respect to the 50-day moving average, the S&P trades 4.94% above the MA, down from 5.9% in the week prior.
The NASDAQ 100 follows the same pattern, trading above the 125-day moving average by 7.1%, down from 8.5% last week, and 10% the week before that. With respect to the 50-day moving average, the NASDAQ trades 4.00% above the MA, down from 4.7% last week, and 5.5% the week before that.
The Nasdaq-100 shows a continued reversion to the moving averages, with the price now just 5.3% above the 125-Day MA, down from 7.1% last week, and 8.5% the week before that. With respect to the 50-Day MA, the current price sits 2.65% above it, down from 4.00% last week, and 4.7% the week before that.
The CBOE VIX stands at 16.69, a slight reduction in the spike last week, where it peaks at 18.61 on Friday.
The 50-day and 125-day moving averages now stand at 21.88 (up from 20.30 last week) and 19.76 (down from 22.49 last week).
Typically we can consider a range between 12 to 20 to be “normal”, with ranges below and above considered low and high. This is contextual, however.
Junk Bond Demand:
The ICE BofA US High Yield Index tracks the performance of US dollar-denominated below investment grade rated corporate debt publicly issued in the US domestic market.
The most recent reading from the 6th of May shows that junk-grade US debt is yielding 4.23%, up 3 bps from last week.
Put and Call Options
As of Friday the 6th, the volume in put options has lagged volume in call options by 49% (reading 0.51).
This marks a 0.08 decline from the 0.59 reading on Friday 30th, suggesting there was a smidgen of additional bullishness from last week’s reading.
The below chart depicts the ratio of the S&P 500 to the Total Return Bond Index. Periods, where the ratio is below 1.0, indicates that bond returns are superior to the S&P 500.
As of May 7th, the ratio reads 1.22, up from 1.213 last week, and 1.209 the week before that.
Finance Twitter Sentiment
The Captain Solutions Fear & Greed indicator analyses sentiment across all the analysts they track, on Twitter, using proprietary AI algorithms. Reports on the past 200 days are aggregated by day.
The current 20-Day moving average reads 36.38, with the 100-Day moving average at 41.50.
The Week Ahead
Here are a few titbits to watch out for in the coming week.
Here, I have compiled some of the events taking place with respect to earnings in the coming week, as well as a collection of interesting insights into the broader market.
Major Earnings for the Coming Week
Some of the major earnings for the upcoming week, compiled by EarningsWhispers.
Thankfully, for me, the majority of my holdings have reported for this earnings season, so I can now take a breather. The season is still going strong, however.
Notable earnings for the coming include Disney, Alibaba, Wish, Palantir, The Trade Desk, Roblox, Wix, Poshmark, Celsius Holdings, Airbnb, Unity, Lemonade, EA, and Affirm.
Growth Ain’t Dead….Yet
Perspective matters, and whilst it might feel like growth is dying a painful death to some investors, the facts are that, for most companies, it’s simply the elastic band giving back some of that tension that was created in 2020.
If we observe the long-run growth vs value chart, we can see that there is still a significant disparity between the two groups. This does suggest there is a huge amount of blood left to flow out of the already bruised segment, if you are inclined to think that way.
Some investors are now realising, or being reminded of, the fact that the price you pay determines your long-run return.
This is something I was reminded of reading over JP Morgan’s guide to the markets report this week. The S&P 500’s forward PE ratio is still sitting at levels not seen until the turn of the century. Depending on when you invested, that period led to dead money for between 6 to 8 years.
Source: (JP Morgan)
I think the next slide confirms that, the price you pay, matters in the long run. Higher forward PEs on the S&P 500, equal significantly lower returns.
However, bear in mind this is data for an aggregated set of companies. I still believe this to be a stock-pickers market.
Source: (JP Morgan)
What should be noted, is that the S&P 500 is largely dominated by big tech. In fact, the overall composition of the top 10 stocks in the S&P 500 has only grown since late 2015. This includes both weighting and earnings generation.
These ten companies are currently Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, Berkshire Hathaway, JP Morgan, Johnson & Johnson, and Visa.
Source: (JP Morgan)
Anyway, something else which seems to be taking place this year, is that investors are shying away from the digital world in favour of the tangible world. Michael Batnick shared an interesting chart during the week, showing the relative performance of a group of stocks such as Peloton, Docusign, Zoom, Spotify, Netflix, Shopify, Teledoc, and Unity, and comparing that to some more traditional physical stocks.
Really kicking myself for selling MGM Resorts at this point…
Source: (The Irrelevant Investor)
Interesting data from Sentiment Trader shows that some of the more ‘momentum’ positioned stocks might be set for a rebound later in the year.
“Through the first 4 months of the year, stocks have barely suffered any downside volatility. This seems like 2013 or 2017, two other recent years that were marvellous for trend followers and miserable for pretty much every other strategy.” - Sentiment Trader
Source: (Sentiment Trader)
“Buying momentum to start the year has rolled over just about every mean-reversion strategy in 2021, and it's tempting to pick a year that seems similar based on eyeballing a chart. We prefer to take a more objective approach using as much data as possible.
Using that discipline, we can go back nearly 100 years and look for every 4-month (84 trading-day) start to the year. We'll then filter the years, looking only at those that showed the highest correlation. There were 19 years with a correlation of more than +0.75 (on a scale of -1.0 to +1.0).
The 4 most recent years that made the cut are shown below.” - Sentiment Trader
Source: (Sentiment Trader)
“Once the years got to about this point, they tended to plateau into the summer months before picking up again in the fall. The overall trend was still up and to the right.
Most of them tended to see some exhaustion about now, or if they did see a further push, gave it back in the month(s) ahead. There were only 2 real exceptions in the past 50 years.” - Sentiment Trader
Goldman Sachs Suggest Share Buybacks are Going to Boom
Goldman Sachs most recent report suggests that buybacks are coming back and with vengeance, now that corporate cash piles are healthier and the impending risks of coronavirus begin to diminish. Bloomberg reported, a few days ago, that they believe there is $2.7 trillion sitting on the balance sheets of the S&P 500 companies.
Big tech has been leading the way, with Apple announcing a further $90 billion for their repurchase program, and Facebook announcing another $25 billion, both during Q1.
Source: (Goldman Sachs)
"Commentary suggests that the main drivers of this increase are excess cash on balance sheets and positive sentiment on the back of strong financial performance" - David Kostin, Goldman Sachs
David Kostin, of Goldman Sachs, suggests that a 35% increase in share repurchases might be ahead of us, after a $484 billion round for US companies in April. He continues to suggest a further 5% increase in FY22. This year has so far marked the fastest pace of US share repurchase to start the year since 2016.
US Claims Below 500K (Shot), Jobs Report Comes in Short (Chaser)
US initial claims landed at 498,000 for the week ended May 1st, after the Dow Jones estimated the number to come in at 527,000. This is down from the previous week’s 590,000 claims.
Source: (Wells Fargo)
This comes alongside the US continuing to vaccinate their population, and some data on labour productivity suggests the labour market is coming back slowly but surely. Overall, nonfarm productivity rose to 5.4% QoQ on an annualised basis.
Source: (Wells Fargo)
This was great news for the States, but maybe slightly less pleasing was the April jobs report which saw the jobs growth stand at 266,000 versus the consensus estimate of 1 million. Private payrolls climbed 218,000 whilst manufacturing employment fell 18,000 and trade and transport declined 81,000. Retail fell 15,000 and temporary help fell 111,000.
It would appear that the issue is not the demand, but rather the supply of workers.
“Fully re-opening an economy after a pandemic is not a seamless process. Temporary layoffs helped employers quickly restart last spring, and are still rather high. But most unemployed workers are now permanent job losers, or re-entrants to the labor force. Advertising positions, interviewing and onboarding new employees takes more time. With individual circumstances also preventing workers from rejoining the workforce in one fell swoop, the pace of hiring has been restrained.” - Wells Fargo Securities
Lumber, Lumber, Lumber, Lumber, Lumber, and Lumber
In case you have not heard, lumber is expensive these days. At the time of writing, futures for May delivery were valued at ~$1,702 per 1,000 board feet. That’s up 17.03% in a week, 94.94% so far this year, and just shy of 420% over the last year.
This all came about after a perfect sandstorm of coronavirus and excess demand for the material. After the onset of lockdowns in March 2020, many sawmills were forced to close or reduce their output considerably. A blow to supply.
Source: (US Department of Labour)
Here is where things got interesting. As we sheltered in place, demand for the material actually increased. Demand for home remodelling, remote working materials, home sales, and home building led to a surge in demand for lumber, which obviously was facing a supply crisis. The demand for home building and office space continued even after lockdowns ended.
Some people noticed this trade quite early, and made a significant return, either through futures, by buying sawmills, or both. Kudos to them. Wells Fargo suggests the demand and supply dynamic might not be over anytime soon.
“Sawmills have struggled to ramp up supply to meet the strong demand. Like many industries, lumber producers temporarily idled capacity last year, and while more capacity has come back online, many are still hampered by operating restrictions implemented to slow the spread of COVID. Producers are struggling to rehire workers, a problem that is becoming increasingly common across all industries.
A shortage of truck drivers and higher diesel fuel prices are adding to the industry's woes, by making it less profitable for timber owners to ship logs to the smaller number of operating sawmills. Producers ramping up production to pre-pandemic levels might not even be enough. Many sawmills were shuttered in the aftermath of the housing bust in 2008, and fewer new mills have opened over the past decade alongside the lacklustre recovery in homebuilding. On top of that, the Pacific Northwest's extensive timberlands have endured massive wildfires recently” - Wells Fargo Securities
General Coronavirus Update
Here are your updates for the global coronavirus situations across some of the world’s most prominent areas, courtesy of data from Danske Research.
• New cases in the US continue to move lower with the 1-week average now below 50,000 (the lowest since October). Hospitalisations are below 40,000 and new deaths below 700.
• The US has now vaccinated close to 150 million with at least the first dose (44.7% of the total population, 56.7% of the adult population). 83% of the over-65s have received at the least the first dose with more than 70% fully vaccinated. All Americans are now eligible for a vaccine. President Joe Biden has set a new target of vaccinating 70% of adult Americans (with 160 million people fully vaccinated) by 4 July.
Source: (Dankse Research)
• EU continues to run at a higher vaccination pace with now more than 25% have received the first shot and 3% per week getting their first dose. Germany is now in the lead among the big EU countries with close to 5% per week getting their first vaccination. The EU projection is still that 70% of the adult population is vaccinated by mid-July.
Source: (Dankse Research)
• In Germany, new cases have turned lower again and patients in ICU have stabilized. It seems tighter restrictions, warmer spring weather and more vaccinations are starting to help. Germany has now vaccinated 28% with the first dose and the higher pace of inoculations adds close to 20% per month to that number. Germany is still using the AstraZeneca vaccine on people above the age of 60.
• Cases in France have continued lower at a quite rapid pace putting the country on track to ease restrictions further. New infections are now around 20,000 per day, a 50% decline from the recent peak a month ago. This Monday, a restriction limiting people to a 10-kilometre radius from their home was lifted and secondary schools partly reopened. On May 19, non-essential businesses will be allowed to reopen and restaurants and café can have outdoor serving. Private gatherings above 10 people remain banned, though. By the end of July, all restrictions are expected to be lifted except for nightclubs. France is falling behind again among EU countries when it comes to vaccinations. The current pace of first doses is 2.5% per week and 23% have received the first dose so far. France continues with the J&J vaccine as planned and still uses the AstraZeneca vaccine on people over 55 (around 1/3 of the population).
• New infections are now around 50% lower than the latest peak. Restrictions were eased 10 days ago opening up for outdoor dining in what Draghi called a calculated risk but so far it is turning out well. It also supports the picture that only limited contagion is taking place outdoors. Italy’s vaccination pace has increased further to 3.3% per week with a total of 25% have received the first dose.
• Restrictions have gradually been eased but some are still in place depending on the region. Spain aims re-opening for tourists from June requiring tourists to show a negative test, proof of vaccination or has recently recovered from the virus. The vaccination pace has slowed a bit to 2.9% per week receiving the first dose from 3.5% in previous weeks. 26.0% have now received the first shot.
• In UK, new cases stay at a very low level and deaths are now down to around 10 per day coming from 1,200 just four months ago. Vaccinations and mass testing are clearly helping and there is no sign of rising transmission after England took the next step in easing the lockdown on 12 April with more shops and outdoor venues opening. The next stage in easing restrictions will be on 17 May where restaurants and pubs will be allowed indoor service. On 21 June the last restrictions are removed with nightclubs opening again as well as limits on social gatherings. More than 50% of the population have received the first vaccine shot while the pace of vaccinations continues at a fairly low rate of 1.2% per week getting the first dose. It is mainly due to more shots now being used for the second dose. Everyone over 50 will be offered a third vaccine in the autumn in an attempt to remove the risk of infections over Christmas entirely, see Reuters. Vaccines are now offered to people over 40 in England.
• In Sweden, the situation looks slightly better with fewer cases and hospitalisations although the situation is still quite serious compared to the rest of the Nordics. No easing of general restrictions in sight yet.
• In Finland, the situation continues to look better day by day and mass vaccination continues. Restrictions are eased step by step although many big concerns and other mass events have been cancelled this summer.
Source: (Dankse Research)
• New cases are still very low in mainland China, Taiwan and Hong Kong. Close to 300 million in Mainland China have been vaccinated corresponding to 20% of the population. The vaccination pace has increased further to 3.5% per week. At this pace close to 50% will have received the first dose in early July.
• Cases in Japan continue higher but the pace has slowed a bit. Tokyo and three other areas have again declared a state of emergency and the governors of Tokyo and Osaka called for their virus emergencies to be extended. Prime Minister Yoshihide Suga is likely to grant the requests. Vaccinations have started late but Japan is set to receive 100 million doses of the Pfizer vaccine in May and June, which will speed up the inoculations.
• In South Korea, cases seem to have started to come down after being on a rising trajectory. Deaths are still low at around 4 per day.
Australia & New Zealand
• Still have very few cases. Still, Sydney imposed some restrictions after two cases were detected. The countries have followed a hard-line approach with very quick local lockdowns when only a few cases arise and so far have managed to keep the virus at bay despite going into autumn months.
• The situation is still very serious in India with a breakdown of the health system. On Thursday a new high in cases was hit at 412,262. On a positive note, the pace of increase has slowed further this week giving some hope that a peak is in sight. Test levels are also lower, though, so it’s too early to say the tide is turning. Local lockdown measures have taken place but prime minister Modi has refrained from a national lockdown. However, the opposition party is calling for a national lockdown to deal with the severe health crisis. The new double mutation called B.1.617 is spreading, but so far studies suggest vaccines are still effective against this variant. So far it has not been classified by the WHO as a ‘variant of concern’ but only a ‘variant of interest’.
• In Israel, new cases hover around 70 per day and new deaths are down to 2 per day (and Israel has had days with zero deaths). Thanks to the vaccines, the economy has reopened without a new increase in the virus. 62.5% have received at least one dose and more than 90% of people aged 50+ have been vaccinated or recovered from COVID. The overall vaccination rate is down a lot to 0.3% per week (people receiving the first dose), which is primarily because the Israeli population is very young (many children), so basically, the vaccination process is completed by now.
Dumb Money Confidence Climbs to 73%
If you will remember, in the first edition of Market Talk, we shared Sentiment Trader’s Dumb Money Confidence Indicator. As a reminder:
The Dumb Money Confidence chart is a model that incorporates more than a dozen indicators that have a track record of cycling to extremes, and equating with ebbs and flows in sentiment among broad categories of investors.
At present, the chart reads 73%, down from the last reading of 71%.
SentimentTrader, states that:
“When Dumb Money Confidence is above 70%, the S&P 500 advances at an annualized rate of 3.0%.
When sentiment is pessimistic and starts to recover, it often pays to do one or more of the following:
Add any available cash to stocks
Shift a portfolio to more aggressive, higher-beta stocks, sectors, or indexes
Remove or reduce existing hedges
Sell (covered) out-of-the-money put options to take advantage of time decay and pumped-up implied volatility levels
Establish some speculative positions via call options or leveraged ETFs
When optimism gets very high (especially in an unhealthy market environment), it almost always pays to become more defensive. That means potentially:
Selling down positions and raising cash
Shifting a portfolio to defensive stocks and sectors
Moving to non-correlated assets like bonds or gold (though it's difficult to rely on Intermarket correlations)
Selling (covered) out-of-the-money call options to take advantage of time decay while stocks likely plateau or decline
Establishing hedges like buying put options or inverse ETFs”
📰 Brain Food 📰
Here is a shortlist of a few interesting pieces from the past week, to feed your mind. Note, these articles are not numerically listed in order of perceived value.
To access the suggested article, click the green link after the source subheading.
1) ”Why We'll Look Back at Our Smartphones Like Cigarettes”
This one is an oldy, written in 2019, but I stumbled across it during the week and found it to quite interesting. I have shared similar beliefs for some time, and I think you might find this discussion about our ever-increasing digital selfs to be fascinating too. Stick with it, and read the whole thing, it’s not awfully long, but it's one that hits quite hard. about the realities of the modern fabric of online interaction.
“"You're gonna look at allowing a 13-year-old to have a smartphone the same way that you would look at allowing your 13-year-old to smoke a cigarette."
2) “Semiconductor Industry Update”
Source: (Seifel Capital)
Coincidently, after me sharing Seifel’s last semiconductor-related post, he has issued yet another free semiconductor industry update. I personally lack insight into this space, so find these writings valuable.
This one is a great insight into how the industry is fairing today, given the much-discussed chip shortage.
“The latest industry data shows current capacity utilization of 96% as of March 2021, which makes sense given the aforementioned chip shortage. Fabrication capacity utilization is the percentage of the total available capacity that is used at a given time. IDMs and foundries are trying to catch up on a massive backlog of orders and have ramped production in response. In line with the market dynamic above, Taiwan Semiconductor (“TSMC”), Intel, Samsung, and others are announcing record levels of forthcoming capital expenditures (referenced below). However, even producing at 96% of capacity won’t bring market supply and demand into balance until some time in 2022.”
3) “Is It Harder For Young People to Get Rich Today?”
Source: (A Wealth of Common Sense)
I like sharing Ben Carlson’s work, as it often short and sweet. Contrary to some of the lengthier pieces I share in the brain food segment. In this piece, Ben discusses why it might be harder for younger generations to get rich in the modern economy.
“The baby boomers started off with a far bigger piece of the pie than millennials at the same age. There are some reasons for this. Millennials are better educated, so they’re putting off going into the working world longer. And responsibilities like getting married, starting a family and buying a home are happening later in life as well.
Throw in the 2008 financial crisis and now it all makes sense. Building wealth for younger generations as a whole will be much more difficult going forward than it was for our parent’s generation.”
4) “A Beautiful Portfolio”
Source: (Farnam Street Investments)
This piece, taken from Farnam Street Investment’s April client letter, was a nice, concise, body of work that asks the question; can a portfolio be beautiful?
“Can an investment portfolio be beautiful?
Our answer is yes, and not just because it “goes up a lot.”
The last section of this letter will provide a detailed update on Farnam Street’s portfolios and the logic behind our circumspect approach. But first, let’s travel back in time... Early industrialists built their wealth through illiquid concentration. Rockefeller in oil. Carnegie in steel. Vanderbilt in shipping and rail. Their empires were tied to one industry, one set of assets. There were no daily quotes. Instead, they measured progress via periodic business results. Buying or selling their interests to others was arduous.”
5) "The Macro is Important for Crypto
Founder of Macrodesic, David Belle, shares his take on the liquidity in the crypto market and seeks to ascertain whether or not the macro environment will become increasingly tied to bitcoin.
“Like any market, liquidity is what drives it.
Bitcoin specifically has rallied off the back of an ABUNDANCE of liquidity; literally, central banks flooding the market with dirty, cheap funding, pushing asset prices higher.But we must be aware now of whether there is a direct opposing issue that could come out of broader institutional adoption...
See, institutions might construct their portfolios differently to you or I. They likely have a mandate that is based on liquidity profiles, volatility and other factors which contribute to the weightings of assets in the overall portfolio.
Bitcoin, being a high beta asset and probably one of the smaller holdings in a broader portfolio, would likely be sold off if the market reckons there's a hint of liquidity removal.”
6) “Week Ahead: Thus spoke Zarathustra”
Scroll down to chart 8, and stop once you get to “A slightly changed view on the SE”. I found this one to be really interesting, comparing the current tech wobbles to the forgotten tech bear market of 1970. It takes two minutes to read and is some great food for thought.
“I (Sarwe) remember it as if it was yesterday – two years old in 1968 and my nanny told me about the stock market, how easy it was to get rich. Just pile into any computer stock and see it head for the moon. So I did and had lost 80% by mid-1970. It was a brief day-trader career. I am joking of course, but there are some eerie similarities today with the build-up to that, nowadays forgotten, tech wreck. We will just list them and see if they set off any alarms for you. Ring a bell?”
7) “An Engine of Visual Discovery, Pinterest”
Source: (Investment Talk)
Shameless self-promotion, I know, but this month’s deep dive focussed on the visual discovery platform, Pinterest. Here, over two parts, we discuss the founding story of the company, as well as the full spectrum of the value proposition to users and advertisers, the core operations of the business, the financials, management, and everything else you need to know about this company.
“When utilising Google, we are often asking questions with reasonably straightforward answers. We ask where the closest coffee shops are. We ask what the weather will be like in central London tomorrow. We ask for the news, SEC filings, the population of Tokyo, the Queen’s birthday, and when the latest iPhone is due to be released. With Pinterest, the questions we ask differ, in that there is often not a perfect response to our question.
We ask Pinterest how should our living rooms be styled, what we should eat for breakfast tomorrow, and how we should style our hair.
When a consumer uses Google, they are searching.
When a consumer uses Pinterest, they are discovering.”
🍬 Ear Candy 🍬
There is a huge range of Podcasts to listen to, and the choice can feel quite saturated at times. Here, I will share one podcast I listened to during the week, that I feel is worth your time.
Visa: The Original Protocol Business
I listened to this one as I was walking through the streets of my home city, and found it to be a great insight into the plumbing of the modern-day financial system.
In this edition of Business Breakdowns, Patrick and Alex set the stage with Visa's role in a card transaction, describe the lifeblood of Visa’s revenue, interchange, and then dive into its unique history as a consortium turned multi-hundred billion-dollar public business.
They then explore Visa’s unique moat and network effect, how Visa makes money today, and look at the potential threats from other businesses and macroeconomic forces.
Host: Patrick O’Shaughnessy
Guests: Alex Rampell
Thank you for reading Market Talk and have a great week,
New to the newsletter? Sign up here.
Want to learn more? Browse the about page.
If you have any ideas related to the information you’d like to see each week, or perhaps where you feel it could improve, please reply to this email, or drop me a DM on Twitter @investmenttalkk.
Lead Analyst at Occasio Capital Ltd