CONSUMER WATCH
Covid-19’s Financial Toll Mounts as Homeowners Keep Postponing Mortgage Payments Some 2.7 million homeowners are still pausing their monthly mortgage bills, and more might need help in the coming months
(…) The proportion of homeowners postponing mortgage payments had been falling steadily from June [8.5%] to November [5.5%], an indication that people were returning to work and the economy was beginning to recover. But the decrease has largely flattened since November, when the current wave of coronavirus cases surged in communities across the country. (…)
“With the waning recovery, and more applications for unemployment claims, we’re likely going to see increased demand for forbearance,” said Ralph McLaughlin, chief economist at Haus, a home-finance startup. “One of the safeguards people have, if they own a home, is to apply for forbearance.”
The roughly 5.5% of borrowers in forbearance represent about 2.7 million homeowners, according to the MBA. (The rate did slip to 5.37% in early January.) At the peak in June, about 4.3 million homeowners were in forbearance plans, according to the MBA. (…)
Just 35% of homeowners with forbearance plans that expired near the end of December were removed from forbearance in the first week of January, according to Black Knight. That was down from an average of 60% in the previous three months. That means more borrowers got extensions on their forbearance plans in January. (…)
Student Loan Payment, Eviction Pauses Extended
(…) The executive order for federal student loans directs the Education Department to extend the pause on principal payments and interest accrual for direct federal loans until at least Sept. 30, 2021. (…)
More than 22 million borrowers with direct federal student loans paused payments during this period, according to data analyzed by Mark Kantrowitz, publisher and vice president of research at savingforcollege.com. (…)
In recent days, Mr. Biden and his transition team said he was unlikely to use executive action for loan forgiveness.
The federal eviction moratorium will be extended to March 31, 2021. Mr. Biden is also asking the Department of Housing and Urban Development to consider extending the foreclosure moratorium and continuing forbearance applications for federally guaranteed mortgages.
U.S. flash PMI: Sharp expansion in business activity in January, despite substantial supply-chain disruption
Private sector businesses in the U.S. indicated a strong start to 2021, as output and new orders rose further. Rates of expansion in business activity accelerated at manufacturers and service providers, with goods producers registering the sharpest upturn in output since August 2014.
Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 58.0 in January, up from 55.3 in December. The private sector seemed to regain growth momentum at the start of 2021, as the pace of increase quickened to the second-fastest since March 2015.
At the same time, private sector businesses signalled another monthly increase in new business. That said, the overall rate of growth eased from that seen in December, as service providers indicated a slower expansion in new orders following a rise in virus cases and greater restrictions on business operations. Nonetheless, the upturn among manufacturers accelerated and was the steepest since September 2014.
Encouragingly, private sector firms signalled a renewed and solid rise in new export orders during January.
Meanwhile, inflationary pressures intensified as supplier delays and shortages pushed input prices higher. The rate of input cost inflation was the fastest on record (since October 2009), as soaring transportation and PPE costs were also noted. A number of firms were able to partially pass-on greater cost burdens, however, as the pace of charge inflation quickened to a steep rate. The impact was less marked in the service sector as firms sought to boost sales, but manufacturers registered the sharpest rise in selling prices since July 2008.
Backlogs of work stagnated across the private sector, as the rate of job creation eased to only a modest pace. Goods producers, however, indicated the quickest increase in employment for two years, with challenging demand conditions in the service sector weighing on overall hiring.
Nevertheless, private sector business confidence picked up in January. Hopes that the vaccine roll-out will be a success and business conditions will improve by the second half of 2021 were overwhelmingly linked to greater optimism.
The seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index registered 57.5 in January, up from 54.8 at the end of 2020. The rise in output was often linked to another monthly increase in customer demand. The rate of expansion was the second-sharpest since March 2015 and steep overall.
That said, the pace of new business growth softened at the start of 2021 as restrictions placed on firms due to the ongoing coronavirus disease 2019 (COVID-19) pandemic dampened demand. The upturn was solid, however, with new business from abroad returning to growth.
The rate of input price inflation ticked up further in January, amid higher transportation and PPE costs. The rate of increase was the fastest on record (since data collection began in October 2009). Although firms sought to pass on part of the price hikes to their clients, many limited charge inflation to ensure they were not uncompetitively priced.
In line with a fractional reduction in backlogs of work, the pace of job creation eased across the service sector. The rate of employment growth was only marginal, as some firms mentioned cost cutting efforts and difficulties finding suitable replacements.
Business optimism improved, however, as firms hoped for a speedy vaccine roll-out and a reduction in restrictions on movement.
Manufacturing firms signalled the sharpest improvement in operating conditions on record in January, as highlighted by the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posting 59.1, up from 57.1 in December. Alongside stronger expansions in output and new orders, the headline figure was driven up by another substantial deterioration in vendor performance.
January data signalled a robust upturn in manufacturing production that was the steepest since August 2014, as new orders rose markedly. Stronger demand from new and existing customers was reportedly behind the expansion, with some clients reportedly committing to orders previously placed on hold. New export orders also rose at the quickest rate since September 2014.
Meanwhile, significant supply chain delays, raw material shortages and evidence of stockpiling at goods producers pushed input prices up. The rate of cost inflation was the fastest since April 2018, with firms raising output charges at the sharpest pace since July 2008 in an effort to partially pass on higher cost burdens to clients.
Greater demand and another monthly rise in backlogs of work led to a quicker increase in employment in January. The rate of job creation was the sharpest for two years and strong overall.
Finally, the degree of business confidence remained strong at the start of 2021, albeit slightly softer than that seen in December. Caution largely stemmed from ongoing global economic uncertainty.
Chris Williamson, Chief Business Economist at IHS Markit:
(…) capacity constraints are biting amid the growth spurt. Not only have the last two months seen supply shortages develop at a pace not previously seen in the survey’s history, but prices have also risen due to the imbalance of supply and demand. Input cost inflation consequently also hit a survey high and exerted further upward pressure on average selling prices for goods and services. (…)
The red circle is July 2008 at +2.5% MoM. Prices tanked thereafter as the Great Financial Crisis took its toll.
If January prices jumped 2.5%, the PPI Goods index would be up 3.2% YoY (dot below) from +0.8% in December. Strong demand has already lifted Core Goods inflation to +1.7% YoY after spending the last 6 years in negative territory. Demand pull, and now cost push while demand stays strong and cash flooding bank accounts …
- The Philly Fed Manufacturing Business Outlook Survey for January:
Price increases were more widely reported this month. The prices paid diffusion index increased 21 points to 45.4. Over 47 percent of the firms reported increases in input prices, while only 2 percent reported decreases. The current prices received index, reflecting manufacturers’ own prices, also increased 21 points to 36.6. Over 38 percent of the firms reported increases in prices of their own manufactured goods, while 2 percent reported declines. The largest percentage of firms (60 percent) reported no change in prices for their manufactured goods.
The prices paid index rose eight points to 45.5, its highest level in two years, indicating a pickup in input price increases. This index has risen a cumulative 41 points since May. The prices received index climbed five points to 15.2, its highest level in a year, pointing to an acceleration in selling prices.
The Eurozone January flash PMI also found sharply rising manufacturing costs:
(…) it was manufacturing where the greatest inflationary pressures were recorded, with average input prices rising at a rate not seen since February 2018. Higher prices were commonly linked to demand exceeding supply availability for many inputs. (…) the lengthening of supplier delivery times in January was the greatest since survey data were first available in 1997.
Here’s a table of various industrial prices courtesy of Haver Analytics. If consumer prices are not lifted as a result, manufacturers are experiencing a major cost squeeze.
This IHS Markit chart shows the link between its PMI manufacturing input price series, supply chain stresses and the eurozone All Items CPI inflation rate. Perhaps the squeeze is currently limited to producers but it could well move to consumers, and financial markets, when demand resumes.
Speaking of demand:
Biden to Sign Buy American Order The executive order will make it harder for federal agencies to purchase imported products and revise the definition of American-made goods.
The new policies will include tightening the government procurement rules to make it harder for federal agencies to purchase imported products, revising the definition of American-made products and raising local-content requirements. The executive order also ensures that small and midsize businesses will have better access to information needed to bid for government contracts. (…)
“We remain very committed to working with partners and allies to modernize international trade rules to make sure that we can use our taxpayer dollars to stir investments in our own countries and strengthen supply chains,” the official said. Avoiding reliance on other countries [guess which] that don’t share the same interests is also a goal, the official said.
The executive order aims to reduce waivers from government procurement rules that allow purchases of foreign products. Steps to be taken will include creating a website to monitor procurement activities of all agencies and appointing a senior official in the Office of Management and Budget to monitor the implementation of the order.
It will also change how the percentages of domestic contents of products are calculated for Buy American rules, while raising the content thresholds for products to be considered made in America. (…)
The Trump rule, among other things, calls for an increase in the percentage of domestic content required for a product to be considered American-made from 50% to 95% for iron and steel products, and to 55% for other products.
Mr. Biden’s executive order directs an increase in both the threshold for local contents and the price preferences for domestic goods—the difference in price over which the government can buy a product from a non-U.S. supplier if the price of competing domestic products are deemed excessively high—but doesn’t state specific levels.
Lastly on inflation, how about food commodity prices?
Surging Grain Prices Fuel Surprise Farm Recovery Prices for corn, soybeans and wheat have soared to their highest levels in more than six years as dry weather and strong export demand from China drain U.S. stockpiles.
Prices for corn, soybeans and wheat have soared to their highest levels in more than six years as dry weather and strong export demand from China drain U.S. stockpiles.
The rising commodity prices are rippling through the food chain, helping drive a sharp increase in U.S. farm income and lifting the prospects for a swath of rural businesses, from grain traders to equipment manufacturers and fertilizer suppliers. (…)
Inventories of corn, soybeans and wheat are on track this season to hit their lowest in at least six years, according to U.S. Agriculture Department forecasts. (…)
Large harvests or a slowdown in U.S. crop shipments to China could dampen the rally in grain markets, though industry analysts say rebuilding domestic stockpiles to comfortable levels could potentially keep prices high for up to two years. (…)
U.S. farm income will top $119 billion in 2020, the USDA said, the second-highest in nominal terms.
Farmers emboldened by the turnaround could sow crops this spring over the largest area since 2014, some agricultural economists and analysts say, planting corn and soybeans on millions of acres kept out of production by regional wet weather the past two seasons. (…)
A turnaround on grain farms will mean high prices for others. U.S. livestock producers and poultry farmers this year could see a 27% jump in prices for grain, the main cost of raising animals, said Will Sawyer, an economist for agricultural lender CoBank. Higher feed costs will also boost expenses for U.S. meat companies such as Tyson Foods Inc. and Pilgrim’s Pride Corp.
Ethanol plants that suffered from a sharp drop-off in demand during the pandemic now face climbing prices for corn, their main raw material.
Some U.S. food manufacturers and grocers say consumers likely will see higher food prices due to rising commodity costs. (…)
U.S. Existing-Home Sales Reach Highest Level in 14 Years Ultralow interest rates and remote work during the coronavirus pandemic spurred demand
(…) Existing-home sales rose 0.7% in December from November to a seasonally adjusted annual rate of 6.76 million, the National Association of Realtors said Friday. The December sales marked a 22% increase from a year earlier. (…)
Existing-home sales, which make up the bulk of the housing market, totaled 5.64 million in 2020, up 5.6% from 2019 and the highest level since the 2006 pace of 6.48 million, NAR said. (…)
While demand has climbed, supply remains tight. Sellers remain wary of listing their homes for sale, partly due to concerns about virus transmission, real-estate agents say.
There were 1.07 million homes for sale at the end of December, down 23% from December 2019, according to NAR. At the current sales pace, there was a 1.9-month supply of homes on the market at the end of December, a record low.
That inventory crunch has spurred new-home construction. Housing starts, a measure of U.S. home-building, rose 5.8% in December from November to the highest seasonally adjusted annual rate since 2006, the Commerce Department said Thursday. Home builder confidence in the single-family housing market rose to record highs in the second half of last year, too.
The median existing-home price rose 12.9% in December from a year earlier to $309,800, near the record $313,000 reached in October, NAR said. For the year overall, the median price rose 9% to $296,500. (…)
(Haver Analytics)
Nothing to slow the demand for goods.
EARNINGS WATCH
From Refinitiv/IBES:
Through Jan. 22, 66 companies in the S&P 500 Index have reported earnings for Q4 2020. Of these companies, 87.9% reported earnings above analyst expectations and 9.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 76% of companies beat the estimates and 20% missed estimates.
In aggregate, companies are reporting earnings that are 23.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.6% and the average surprise factor over the prior four quarters of 12.4%.
Through Jan. 22, 66 companies in the S&P 500 Index have reported revenue for Q4 2020. Of these companies, 81.8% reported revenue above analyst expectations and 18.2% reported revenue below analyst expectations. In a typical quarter (since 2002), 61% of companies beat estimates and 39% miss estimates. Over the past four quarters, 67% of companies beat the estimates and 33% missed estimates.
In aggregate, companies are reporting revenue that are 3.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.0% and the average surprise factor over the prior four quarters of 1.8%.
The estimated earnings growth rate for the S&P 500 for 20Q4 is -5.7% [it was -10.3% on Jan. 1]. If the energy sector is excluded, the growth rate improves to -2.2%. The estimated revenue growth rate for the S&P 500 for 20Q4 is -0.8%. If the energy sector is excluded, the growth rate improves to 2.3%.
The estimated earnings growth rate for the S&P 500 for 21Q1 is 18.1% [16.1%]. If the energy sector is excluded, the growth rate improves to 19.6%.
Trailing EPS are now $138.25. Full year 2021 estimate: $169.70. 2022: $197.06.
The Rule of 20 P/E on actual trailing EPS is 29.2. On “normalized” EPS of $170: 24.0.
NABE Panelists Report Increasing Optimism about Economic Growth over the Next 12 Months, as Profit Margins Rise at More Firms, and Expectations for Hiring Grow More Widespread
• (…) The forward-looking NRI for anticipated sales over the next three months continues to rise, from 31 in October to 38—the highest reading since the April 2019 survey.
• Profit margins reversed course in Q4, with more respondents reporting profits rising than falling. The NRI for profit margins increased 18 points to 14 from -4 in October. The share of respondents reporting rising profit margins increased from 21% in October to 30% in January, while the percentage reporting falling margins declined 9 percentage points— from 25% in October to 16% in January. Of the survey’s four sectors, the goods-producing sector experienced the largest jump in the NRI for profit margins, a 56-point swing from -18 in October to 38 in January.
• The NRI for prices charged is 15, having surged 14 points from October. NRIs by sector, however, vary significantly. The January NRI for goods-producing firms is 71, after registering 21 in October. (…) the NRI for service sector firms, with a reading of 8, up from 3 in October, and the NRI of 25 for the transportation, utilities, information, communications (TUIC) sector. The share of respondents expecting price increases in the next three months continues to rise—35% in January compared to 26% in October—resulting in an NRI of 30. Five percent of panelists anticipate falling prices in the next three months.
• The NRI for materials costs accelerated to an NRI of 28, the highest reading since April 2019. All sectors registered positive NRIs, led by goods-producers at 62. The NRI for expected costs rose significantly, from 8 to 34, after having been as low as -21 in April 2020.
• The NRI for wages and salaries rebounded to 19 in the January survey, a clear continuation in the recovery from the depths of the COVID-19 slump during 2020. The upward movement in the index resulted from an increase in the share of respondents citing rising wages—to 28% from 17% in October—and a decrease to 9% from 13% in the share reporting falling wages.
• The NRI for employment rose to 7—the highest reading since October 2019, and the first positive value since April 2020. The share of respondents citing decreased hiring activity fell from 27% to 13%, while 19% report employment increased at their firms compared to 9% in the October survey. All sectors have positive NRIs. The NRI for the services sector rose from -5 in October to 6. The largest increase is in the goods-producing sector, up 54 points to 8 in January. Respondents remain optimistic regarding the near-term outlook for employment, as the forward-looking NRI rose to 21 from 1 in the October survey. Respondents from all sectors expect their firms will add jobs rather than reduce headcount in the near term. (…)
• After negative readings for three straight quarters, the NRI for capital spending bounced back strongly in the fourth quarter, rising from -8 to 15—the highest reading in one year. Twenty-eight percent of respondents report that capital spending at their firms rose during Q4, up from 19% in Q3, with the percentage citing declining investments shrinking from 27% to 13%. (…) The forward looking NRI for capital spending is strongly positive, rising from 6 in October to 22 in January. The percentage of respondents expecting increased activity jumped from 19% to 34%. (…)
• Respondents’ near-term outlook is little changed compared to that in the October survey. Thirty-four percent of respondents report a “Better” outlook compared to a month ago, down slightly from 36% in October. Only 6% cite a “Worse” near-term outlook, compared to 8% in the previous survey. (…)
• Nearly one-third (32%) of respondents reports that sales volumes have already returned to their normal level of operations, while 36% expect that to happen sometime in 2021. (…)
SPACs Are Invading Wall Street “Blank check” firms known as SPACs are in pursuit of America’s hottest startups. Is the invasion a sign of a market euphoria that can’t last?
(…) Nearly 300 SPACs are now seeking deals, armed with about $90 billion in cash. And more are rolling out at a furious clip—so far this year, an average of five new SPACs launched each business day. (…)
Some on Wall Street call them “blank-check companies’’ because the investors backing the SPAC put up their money months before an acquisition target is identified, trusting the people running the show to find a good deal.
These deals are generating a lot of interest because they produce big paydays for their creators, make it easier for startups in hot industries such as electric vehicles to capitalize on a frothy run-up in the stock market and offer everyday investors a new path to a hot stock. When a SPAC buys a firm, it merges with it in a sort of accelerated IPO process—a so-called “reverse merger”—while bypassing the normal scrutiny an IPO receives. (…)
Chief Executive Officer David Solomon warned on the company’s earnings call Tuesday that the flurry of activity isn’t sustainable. Goldman is one of the biggest banks benefiting from the SPAC boom. (…)
The SPACs are pulling in more than 70% of all money raised through initial public offerings this month, up from nearly half last year and about 20% the year before, according to Dealogic data through Thursday. The 67 SPACs created this year have already raked in nearly $20 billion from investors. That is well above the total from all of 2019, which was a record before last year’s historic haul of $82 billion.
On Wednesday alone, six new SPACs launched (…). Eight more went public on Friday.
Many of the 287 SPACs currently hunting for targets are looking for deals in hot sectors such as technology or electric vehicles, according to figures from data provider SPAC Research. Blank-check firms often seek deals valued at least five times as large as they are when including debt. That means deals adding up to several hundred billion dollars are likely to be completed in the coming months, analysts say, setting SPACs up to be a powerful force in markets. When a SPAC is launched, it has to merge with a target within two years, so the effects of this wave will continue for a while. (…)
What some don’t like is that SPACs and the mergers they produce are negotiated behind closed doors and prices are less dependent on real-time demand from investors. In a traditional IPO, pricing can change until the night before shares start trading. Another concern is that companies going public through SPACs are allowed to more easily tout their long-term growth forecasts in splashy presentations on YouTube instead of staying silent as they would during a traditional IPO. (…)
The average time it takes for a SPAC to find a merger deal dropped from 17 months in 2018 to five in 2020, and many lately have needed less than that. (…)
In total, 26 companies tied to mobility and technology merged with SPACs in 2020 and recently had a combined market value of more than $100 billion, according to data provider PitchBook. Many of them have little to no revenue. An index of those companies posted a total return of nearly 80% in the second half of last year. (…)
“People will look at the proliferation of these vehicles very similarly to the way they look at the craziest ideas that were being thrown around at the peak of the dot-com bubble,” said Mr. Atwater, the founder of Financial Insyghts.
Charts from SPAC Research:
Demand for warrants is similarly elevated — the SPAC Research Warrant Index, which measures how much the market is willing to pay for SPAC warrants without an announced transaction, is pushing all-time highs again.
(…) Goldman’s equity underwriting brought in a record $1.12 billion in fees in the fourth quarter, nearly triple what it had the year before. For the year, the business took in $3.41 billion in fees, more than double 2019’s $1.48 billion. (Its advisory unit brought home $3.07 billion.)
At Morgan Stanley, MS -0.76% No. 2 in the equity-underwriting business for the year, fees more than doubled in the fourth quarter. For the year, they rose 81% to $3.09 billion, also eclipsing deal making fees.
JPMorgan Chase JPM -0.77% & Co. came in third in equity underwriting, boosting its fees 88% in the fourth quarter. Fees surged 66% for the year, to $2.76 billion. (…)
And smaller Jefferies Financial Group Inc., JEF -2.26% a big SPAC supporter, put out a quarter one analyst said was “unlike any earnings report that we have seen.” It more than tripled its equity underwriting fees to $341 million. For the fiscal year, which ended in November, equity underwriting fees totaled $902 million, up from $362 million in 2019. (…)
“You have something here that is a good capital markets innovation, but like many innovations there’s a point in time as they start where they have a tendency maybe to go a little bit too far and then need to be pulled back or rebalanced in some way,” [GS] Mr. Solomon said. “And that’s something my guess is we’ll see over the course of 2021 or 2022 with SPACs.”
Wall Street is launching a third exchange-traded fund that invests in special-purpose acquisition companies, accelerating a rush to cash in on investors’ enthusiasm for so-called blank-check firms.
The hedge fund Morgan Creek Capital Management and the financial-technology company Exos Financial plan to launch the SPAC ETF on Tuesday, the companies said. The new Morgan Creek-Exos SPAC Originated ETF will trade under the ticker SPXZ and consist of a mix of firms that recently went public by merging with a SPAC plus shell companies that are still seeking startups to take public. (…)
Both of the existing SPAC ETFs have raked in millions of dollars in recent days, with investors piling into SPACs and the startups that merge with them, according to FactSet.
Because of unique incentives inherent in their structure, blank-check firms often enrich their founders, their earliest investors and the banks that advise them. (…)
Morgan Creek and Exos will make decisions about its holdings rather than having the ETF passively tracking an index. (…)
ETF: Enjoy The Fun
In epistemology, and more specifically, the sociology of knowledge, reflexivity refers to circular relationships between cause and effect, especially as embedded in human belief structures. A reflexive relationship is bidirectional with both the cause and the effect affecting one another in a relationship in which neither can be assigned as causes or effects.
Within economics, reflexivity refers to the self-reinforcing effect of market sentiment, whereby rising prices attract buyers whose actions drive prices higher still until the process becomes unsustainable. This is an instance of a positive feedback loop. The same process can operate in reverse leading to a catastrophic collapse in prices. (Wikipedia)
Perhaps you don’t know Cathie Wood, head of Ark Investment Management. Ms. Wood has turned the ETF industry (passively managed, index tracking low fee funds) 180 degrees back to good old mutual funds (actively managed, higher fees) having innovated by simply actively managing her themed ETF, piling in some high-powered momentum stocks such has TSLA (9.0% of her fund), ROKU (7.5%), TDOC (4.9%) and CRSP (4.8%). Her ARK Innovation ETF returned 175% in the last year, 51% in the last 3 months, and drew nearly $10B (+70%) in new money in 2020. Obviously, other asset managers noticed and mimicked, attracted by the flows and the much, much higher fees (avg: 0.72% vs 0.05% per Bloomberg).
Even if you don’t care about ETFs, you should really care about this rebirth of actively managed funds and rock star managers. Here’s Almost Daily Grant’s last week (my emphasis):
(…) Fund manager ARK Invest attracted a fresh $1 billion yesterday across their seven exchange traded funds according to Bloomberg senior ETF analyst Eric Balchunas, bringing year-to-date inflows to $6.7 billion. (…)
Last week, the fund manager submitted a regulatory filing disclosing plans to launch a “Space Exploration ETF,” spurring 20% one-day share price pops in presumptive components Virgin Galactic Holdings, Inc. and Maxar Technologies, Inc. (SPCE and MAXR, respectively, on the NYSE).
The investment manager’s fast-growing bank account is helping it build several highly concentrated positions. ARK held more than 10% of the float in at least 26 companies concentrated in the biotech and technology industries, according to a recent analysis from Barron’s.
As funds continue to pour in and ARK’s ownership stakes grow, the manager’s investment decisions could begin to take on a life of their own. “There is this degree of reflexivity almost,” Ben Johnson, director of global ETF research at Morningstar, told Barron’s on Friday. (…)
According to data from ETF provider Global X, thematic funds controlled $104 billion in assets as of Dec. 31, up 78% from the prior quarter. (…)
That is $45B in new cash in these thematic funds in 3 months. We can all guess what the attractive themes are, with their managers scrambling to put to work the new money, likely all chasing the same themed stocks, boosting prices and returns, attracting more money, yaddi, yaddi, yadda…Positive reflexivity.
Watch for the eventual negative reflexivity, particularly if that hot money changes course.
ADG quotes a research paper showing that thematic ETFs have actually “underperformed significantly” between 1993 and 2019 “delivering negative alpha of about 4% a year. (…) our evidence suggest that thematic ETFs are launched just [at] the very peak of excitement around an investment theme.”
Bloomberg reminds us that “over the decade through June 2020 (the most recent data available), about 82% of large-cap stock funds lagged the S&P 500, according to S&P Dow Jones Indices.”
Eventually, ETF will stand for Extend The Fall.
INSIDERS
The INK US Sentiment Indicator dipped slightly last week to 24% meaning there were slightly more than 4 stocks with key insider selling for every one with buying. For the second week in a row, that sets a 2-year low.
Selling is heavy and broad with only Financials (75%) and Utilities above 50% (60%). All other 8 sectors show a Sentiment Indicator of less than 24%, averaging 15%.
Canadian insiders seem less concerned with an overall Sentiment Indicator at 72% with strong insider buying in Energy (168%), Basic Materials (151%), Consumer Non-Cyclicals (100%), Financials (109%) and Health Care (173%). Technology is very weak at 31%.
Insiders not only sell their own shares, they also direct what their companies do:
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Companies Sell Stock at Record Pace to Start the Year U.S.-listed companies have conducted 80 follow-on stock offerings this year through Friday, raising $16.35 billion
(…) Companies raised $167.2 billion through 454 [initial public] offerings on U.S. exchanges through Dec. 24, surpassing the previous full-year record for money raised that was set during the dot-com boom in 1999. (…)
Filings for IPOs in January alone total 111.
But insiders increasingly piggy-back and sell some of their own shares. The WSJ article says that “U.S.-listed companies conducted 862 such offerings last year, raising $257.23 billion, the most in a year by either measure in records dating to 1995, according to Dealogic.”
There were 110 secondaries filed in January, 31 last week.
Goldman Team Sees ‘Unsustainable Excess’ in Parts of U.S. Market Corners of the U.S. equity universe are showing signs of froth, the bank says.
Very high-growth, high-multiple stocks “appear frothy” and the boom in special-purpose acquisition companies is one of a number of “signs of unsustainable excess” in the U.S. stock market, strategists including David Kostin wrote in a note Friday. The recent surge in trading volumes of stocks with negative earnings is also at a historical extreme, they said.
However, the aggregate stock market index trades at below-average historical valuations after taking into account Treasury yields, corporate credit and cash, the strategists added.
“Pockets of the market have recently appeared to demonstrate investor behavior consistent with bubble-like sentiment,” the team wrote. “But these excesses present low systemic risk to the broader market given their modest share of market cap.” (…)
“A proper bear market will eventually come, it always does after a bubble,” wrote the Citi team including Robert Buckland. “But markets may get more bubbly first.”
John Authers in a lengthy Bloomberg piece:
(…) For many years, Citigroup Inc.’s chief U.S. equity strategist Tobias Levkovich has been monitoring a “panic/euphoria” index, whose components are as follows: NYSE short interest ratio, margin debt, Nasdaq daily volume as a percentage of NYSE volume, a composite average of Investors Intelligence and the American Association of Individual Investors bullishness data, retail money funds, the put/call ratio, the CRB futures index, gasoline prices, and the ratio of price premiums in puts versus calls. On this measure, euphoria is its highest on record, exceeding even the tech bubble:
For another quantifiable measure of excess, look at BofA Securities Inc.’s gauge of cash held in institutional portfolios. This is the lowest since the firm started measuring it, suggesting fund managers feel little need of a cushion:
(…) A more specific note of alarm is that non-profitability appears to have become a virtue again, as it was briefly at the top of the tech bubble. This amazing chart was tweeted by my Bloomberg Opinion colleague James Bianco of Bianco Research, and shows the performance of Goldman Sachs Group Inc.’s index of tech stocks that have yet to turn a profit:
(…) As for bonds, it is hard to say that anyone is madly speculative about them. But yields really are historically low. The following charts from Deutsche Bank AG’s Jim Reid are built on quite a lot of financial archaeology, and speak for themselves. It takes a lot to believe that interest rates can stay this low indefinitely:
The scales for Italy and Germany do indeed go all the way back to the 1300s. If stocks’ valuations are dependent on bond yields staying this low, that isn’t encouraging. (…)
