Philly Fed Hits a 21 Year High

To say that today's release of the Philly Fed Manufacturing report for the month of November was stronger than expected would be a gross understatement.  The report absolutely crushed expectations.  While economists were forecasting a level of 18.50, the actual level of the current conditions index spiked to 40.8.  To put this level in perspective, it was the highest monthly reading since December 1993, and was just the eighth highest monthly reading since 1980.  In terms of this month's 20.1 point increase, that was the largest monthly increase since June 2009.  And finally, relative to expectations, it was the biggest beat since at least 1998.  Although this indicator tends to be volatile, it was quite simply one of the strongest economic data points we have seen in quite some time.

The table to the right breaks down this month's Philly Fed report by each of its different components.  As shown, while the headline reading blew the doors off, the internals were not quite as strong.  While Shipments, New Orders, and Number of Employees saw big increases, we also saw declines in a number of components.  Based on Prices Paid and Prices Received, inflation doesn't seem to be much of a problem as these two saw larger declines than any other components.  The price data makes sense given weak PPI internals in yesterday's report.  To sum up, the internals of this month's Philly Fed are a microcosm of the quandry currently facing the Fed.  The labor market is tightening (big increases in Number of Employees and Average Workweek), but inflation is low, meaning the justification for rate hikes is still pretty weak based on macroeconomic data.


Wave of Misses for Flash PMIs

Overnight Flash PMIs were released for major economies with Manufacturing Flash PMIs released in Japan, China, France, Germany, the Eurozone as a whole and the United States.  Services Flash PMIs were also released for France, Germany and the Eurozone.  As shown in the bar chart below, there was only one sequential improvement (French Services) and only one beat (French Services again).  Every other major global Flash PMI reading missed and deteriorated versus October.  While most Manufacturing readings are still expanding, things are getting dicey in the Eurozone, and there's no improvement visible; the same is true of Services.  The United States, meanwhile, is the anchor of global growth.

While the US Manufacturing figure missed and declined notably, American manufacturers are still by far the best house in a gloomy neighborhood with regards to global economic activity as measured by the PMI readings.  Below we show the trend in US Manufacturing PMI, and while the trend in accelerating (higher sequentially) PMI readings has been broken, the current reading of 54.7 is still half a point above the three year average (54.2) and well above three year lows (51, set on 10/31/12).  In other words, the PMI data confirms that for the time being, the US economy is shrugging off the weight of a worsening global growth picture for major economies.


Bullish Sentiment Back Below 50%

In yet another example of how investors just can't stand to be bullish for any extended period of time, today's reading of bullish sentiment by the American Association of Individual Investors (AAII) dropped by 8.8 percentage points from 57.93% down to 49.12%.  This week's decline in bullish sentiment was the largest since June 19th and the third largest weekly drop this year.  Keep in mind, however, that last week's level was the highest in more than four years and the second highest weekly reading of the entire bull market.

Along with the drop in bullish sentiment we also saw a moderate increase in bearish sentiment, which rose from 19.31% up to 23.82%.  This week's increase was the second straight week where bearish sentiment increased by more than four percentage points.  The last time we saw back to back weekly increases of four percent in bearish sentiment was in June 2013.


Jobless Claims Slightly Higher Than Expected

For the second week in a row this week, jobless claims came in higher than expected.  While economists were expecting a level of 284K, the actual reading came in at 291K, down 2K from last week.  With this week's weaker than expected report, jobless claims have now been higher than expected in four of the last five weeks.  That being said, claims are still below 300K, a level they haven't eclipsed to the upside in 10 weeks now.  The last time we saw a streak of sub 300K reading that last 10 or more weeks was in 2000.

The four-week moving average for jobless claims currently stands at 287.5K, which is an increase of 1.75K from last week's level.  After five straight weeks where the four-week moving average made new post-recession lows, the four-week moving average has now increased for two weeks in a row.

On a non-seasonally adjusted basis (NSA), initial jobless claims fell by 24K to 285.3.  For the current week of the year, this is the lowest reading since 2005, and 86K below the historical average for the current week dating back to 2000.


Mixed Housing Data

After a big jump in sentiment based on Tuesday's NAHB Home Builder Sentiment report, today's data on Housing Starts and Building Permits was mixed. For Housing Starts, economists were expecting a seasonally adjusted annualized rate of 1.025 million, but the actual level came in slightly weaker at 1.009 million, which was down from last month's reading of 1.038 million.  While Housing Starts were weaker than expected, though, Building Permits exceeded forecasts rising to a SAAR level of 1.08 million compared to forecasts of 1.04 million.  

The table below breaks down this month's Housing Starts and Building Permits reports by type of unit and by region.  Even though October's Housing Starts report was weaker than expected, all of the weakness was driven by multi-family units, which declined by 15.4% m/m.  At the same time single-family units rose by 4.2% to 696K.  As shown in the chart below, this was the second highest reading for single-family units of the recovery, behind only November 2013's level 710K.  Because single-family units are considered to be more economically significant than multi-family units, this increase was a silver lining to what was otherwise a modestly disappointing report.  On a regional basis, Housing Starts declined in October in every region except the South, where they rose by 10%.

As mentioned, October's Building Permits report was a little more positive, coming in at a SAAR total of 1.080 million, which is the highest since June 2008.  In this case, we saw increases in permits for both single and multi-family units which rose 1.4% and 10.0% respectively on a month over month basis.  On a regional basis, we saw declines in the Northeast (-21.5 m/m) and Midwest (-11.4% m/m), while Permits for October in the South (+8.8% m/m) and West (+21.6% m/m) saw increases. 



What's been doing well in this market?  Everything but Energy.  The #EBE tagline is highlighted below.  In the chart, we show the percentage of stocks in each sector that are trading above their 50-day moving averages.  As shown, seven sectors and the S&P 500 have readings above the 80% level, with Consumer Staples and Utilities both above 90%.  Materials and Consumer Discretionary are both above 75%, and then you have Energy way down at 37.2%.  Hey, it's better than the 0% reading Energy had for a few weeks in early October!


NAHB Homebuilder Sentiment Robust

November NAHB Homebuilder Sentiment exceeded estimates this morning and improved sequentially, coming in at 58 versus expectations of an increase to 55 from 54 in October.  At right we break down the changes within each sub index and the regional indices.  Every index improved sequentially, a pattern we last saw in July.  This is the first time since 2004 that all indices have improved sequentially in at least two monthly reports within the calendar year.  Particularly strong were gains in the Northeast and West regions, where sentiment surged ahead of the cold weather we got over the last two weeks.  

In a trend we've seen all through the recovery in the housing market since 2009, Traffic has continued to lag other indicators, indicating that while demand is adequate, it's not broad based.  This tracks well with the notably suppressed household formation rate, mortgage production indices, and new home construction rates we've seen over the same period: not only can fewer Americans afford a home, many appear to be less interested in owning than has historically been the case.  That said, as measured by the NAHB sentiment indices, the housing market is as healthy as it's been in years.

Below we chart the NAHB headline, sub index (since 1985) and regional series (since 2004).


S&P 500 Energy Sector Trading Range Screen

A few weeks ago we posted the trading range screen below highlighting the 30 largest stocks in the S&P 500 Energy sector.  At the time, every single stock in the screen was at or near extreme oversold territory.  Below is an updated look at the screen.  For each stock, the dot represents where the stock is currently trading, while the tail end represents where the stock was trading one week ago.  The black vertical "N" line represents the stock's 50-day moving average, while moves into the red or green zone are considered overbought or oversold.  Generally speaking, stocks at the far right of the screen (extreme overbought) or the far left of the screen (extreme oversold) are due for some sort of mean reversion back towards their 50-days.

As shown, most Energy names have worked their way out of oversold territory over the last couple of weeks.  As of the close today, 9 remained oversold, 18 were neutral, and 3 were overbought.  Even with news that Halliburton (HAL) was buying Baker Hughes (BHI), Kinder Morgan (KMI) is actually the most overbought name on the list, ahead of BHI.  Kinder Morgan has had a nice run over the last week or so, but it's not quite at extreme overbought levels that would trigger a warning flag.  KMI's chart is actually looking pretty strong here and has a lot of upside momentum (as judged by its long tail).

Earlier this year, it seemed like any time a corporate acquisition was announced, both the target and the acquirer would trade higher -- bucking conventional wisdom on M&A.  This trend didn't play out for Halliburton (HAL) shareholders today, however.  As shown below, after falling 10% today on its BHI acquisition announcement, HAL is now 16% below its 50-day moving average and back into oversold territory.  The stock also moved back into the red for the year, and it broke key support at the $50 level.  


YTD Sector Returns Heatmap

Below is an update of our year-to-date sector returns heatmap.  It's a great way to see the various trends and rotations between sectors through the course of the year.  The heatmap shows the year-to-date performance for each sector at the end of every trading day of the year.  Red areas indicate underperformance versus other sectors year-to-date, while green areas indicate outperformance.  So the darkest red sectors are the worst performers year-to-date at whatever point in the year you're looking at, while the darkest green sectors are the best performers year-to-date at that point.  Using this visualization, it's easy to track the over- or under-performance for each sector as the year has progressed.

Utilities have been a big performer all year, while Consumer Discretionary has consistently lagged the rest of the market.  Industrials did terribly during the peak of US Dollar appreciation (a trend that's still underway, just less rapidly) while Energy has fallen off a clif moving from one of the best performers to one of the worst in less than two months.  Finally, Health Care has been a source of alpha all year: during the second quarter it kept up with the market while it has seen outperformance over the whole course of the first, third and fourth quarters to date. 

Below the heatmap, we also provide a table showing the year-to-date return for each S&P 500 at the end of each month.

For more sector analysis make sure to check out Bespoke's Sector Snapshot over at Bespoke Premium.  Sign up today for a five day free trial and receive the Sector Snapshot on Thursday afternoon.


Bullish Sentiment Down Once Again

Bullish sentiment in our weekly Bespoke Market Poll fell another 3 percentage points this week from 58% down to 55%.  After peaking at 68% on November 3rd, bullish sentiment has now fallen 13 percentage points over the last two weeks.  While the market has traded slightly higher and hit new all-time highs over the last two weeks, investors appear to have tempered their enthusiasm for stocks quite a bit.


S&P 500 Higher or Lower from Here?

The S&P 500 finished the week slightly higher once again, leaving the index right near all-time highs.  So which way will the market head from here?  Please take part in our Bespoke Market Poll below by letting us know whether you think the S&P 500 will be higher or lower one month from now.  We'll report back with the results on Monday before the open.  Thanks for participating, and have a great weekend!  

Be sure to sign up for a 5-day free trial to any of our Bespoke subscription services to check out our popular Bespoke Report newsletter.  It's must-read on the Street each week!

Will the S&P 500 be higher or lower than its current level one month from now?
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Technology Finished on Top

The third quarter earnings season closed its doors yesterday with Wal-Mart's (WMT) report.  For the full season, 62.1% of the 2,400+ companies that reported earnings beat consensus analyst EPS estimates.  

Below is a breakdown of the earnings beat rate by sector this season.  As shown, Technology sector stocks beat earnings estimates at the highest rate.  71.3% of Tech stocks beat estimates.  The next closest sector was Health Care at 66%.  

At the bottom of the barrel are four sectors in the low-50s -- Materials (52.8%), Energy (52.2%), Utilities (50.7%) and Telecom (50%).

Over at Bespoke Premium, we'll have a full run-down of the just-completed third quarter earnings season in our weekly Bespoke Report newsletter due out after the close today.  Sign up for a 5-day free trial today!


UA = CMG...Wait What?

We look at a lot of stock charts here at Bespoke, and in doing so sometimes patterns just jump off the screen.  This morning, we noticed one that seemed too ridiculous to be true, to the point where we had to check that our screens were working properly.

The degree of similarity for these two charts is nothing short of amazing.  Chiptole Mexican Grill is a purveyor of burritos (which the Bespoke team have been known to enjoy occasionally) while Under Armour makes high performance sports apparel and accessories.  Chipotle operates fast casual restaurants and interfaces directly with consumers, while the vast majority of Under Armour's sales come via relationships with third party retailers.  Chipotle is exposed to agricultural commodity costs while the synthetic materials that are used in producing Under Armor clothing are a whole seperate area of the commodities markets.  While both companies are pursuing similar segments of the population (semi-affluent or affluent consumers with active lifestyles and strong brand awareness), we didn't think the phenomenon of hitting Chipotle for carnitas after your work out in Under Armour gym wear was so widespread.  But with a 0.94 correlation...

Unfortunately, we think this is an example of a spurious correlation.  The two both happened to get a great earnings reaction at the end of July, and their respective relationships with the broad market explain the rest of the similarity in their price action.  That's broadly supported by the following chart, which indexes both stock's prices to 100 as-of 2/2/14.  Both have moved similarly but Under Armour is the clear winner in terms of returns.

This is also supported by looking at returns, which we do below.  What was a 0.94 r-squared for price becomes a 0.21 r-squared for daily returns: in other words, the relationship isn't as strong as it initially looked.

This is a good example of spurious correlation, but it is worth thinking about why there's any relationship between the two names at all.  The similar moves off of earnings are certainly a factor, but even more interesting is how each responds to broad market conditions.  Both are revenue-growing darlings of the momentum trade.  Their marginal investor is similar, and they trade in a very similar way every day.  So while the apparent correlation isn't actually a real relationship, we do think that it's worth remembering that no stock trades in isolation: they're all exposed to the broad market, and stocks that are held by similar investor types often react to broad market conditions in similar ways.

As a reminder, The Bespoke Report will be out this evening.  If you haven't ever tried Bespoke Premium, sign up for a free trial now to get our weekly recap and outlook in your inbox.  Cancel for free if you don't like the first five days of the service.  Make sure to use “fallspecial” at checkout to receive 10% off, in case you decide you like what you read tonight!


The Many Subjects of King Dollar

The move higher in the US Dollar has rightfully gotten a lot of attention this year.  On a year to date basis, the move has been parabolic, with a brief pause in mid-October until a new wave of quantitative easing in Japan unleashed another rally driven higher by the gains for USDJPY.  The US economy has been resiliant in the face of a possible global slowdown, with the labor market whirring away, output humming, and the end of QE standing in stark contrast to other major economies.  Whether that set of conditions (and the gains for the dollar) continue is an open question, but for now the dollar reigns as king.  Below is a chart of the Bloomberg USD Index year-to-date for 2014.

Given the impressive performance of the dollar, we thought it would be interesting to look at other big currency winners and losers this year.  The performance (%) for all of the currencies in the table below are measured in terms of the USD, and we've also included November to date performance. 


Strong Internals for JOLTS Report

Today's Job Openings and Labor Turnover Survey (JOLTS) suggested a continued improvement of labor market internals, specifically higher quit rates and more turnover as workers moved between employers.  While the most widely-reported headline number was a miss (4.735 million job openings versus 4.8 million expected and 4.835 million previous, revised up to 4.853 million) the internals suggest the marginal worker is gaining confidence and moving in to the market by switching jobs via quits.  The quit rate hit its highest level of the expansion (2.0% for all positions, 2.2% for private positions, and 0.8% for government positions) continuing roughly on-trend but representing a dramatic jump versus last month, when we said the following:

But it wasn't all good news: the quit rate is stubbornly low.  Given that wages are refusing to move higher, this shouldn't be a huge surprise.  Without a higher wage waiting for them at a new job opening, why would a worker depart their existing employer?  Quits are just another sign that while demand is increasing for labor, supply remains high, keeping prices (wage growth and quits) low.

While wage growth hasn't kicked in yet, the quit rate is a good sign that employees are gaining confidence and seeing demand; the marginal worker is seeing enough wage enticement to jump ship, and that marginal worker is an increasingly large share of the total labor force.

The context for this improvement in quits is an extremely low level of firings.  Layoffs remain near all-time lows.

As a result, total separations rate is still quite low but ticking up, driven by good seperations: quits by workers seeking better opportunities (and likely higher wages) elsewhere.

While the number of job openings ticked down and missed expectations, it's still on-trend with explosive growth to the upside that went parabolic in Q2 of this year.

On balance this was a very strong report, about as strong as could be expected without raising questions about the validity of the underlying data.  Higher worker turnover is unambiguously good for wages, as it represents a more efficient functioning of the labor market during a period of rising labor demand.  Employers that are able to offer higher wages pick up workers and the result is higher incomes for consumers as lower paying jobs are abandoned for better opportunities.  This is only the latest in a series of indicators (nonfarm payrolls, initial and continuing jobless claims, labor force participation, hours worked) that show at worst a very steady expansion of the labor market and at best that we are getting very close to an inflection point towards higher wages.  While there is still a lot of ground to be made up relative to the last economic expansion (see charts above), JOLTS is quickly becoming a less steady justification for the Fed's desire to keep rates "lower for longer" now that QE is over. 

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