Notes:
-I have a new channel on YouTube where I share my latest thoughts on markets and investing. You can view the most recent video here.
__
This week’s post is sponsored by YCharts. YCharts is giving 100 of our readers free access to their Professional platform until December 16th. Sign up here. With YCharts you can conduct investment research, monitor the markets, and share insights with others.
__
The charts and themes from the past week that tell an interesting story in markets and investing…
1) The Housing Recession
The debate over whether the US economy is in a recession rages on, but there’s is no doubt about the status of the US housing market. This is what a housing recession looks like:
-The US Housing Market Index (measure of homebuilder confidence) fell for the 11th consecutive month to its lowest level since April 2020. 37% of builders reported cutting prices in November, with an average price reduction of 6%.
-Building Permits hit a 26-month low in October, down 10% year-over-year.
-US Existing Home Sales fell for the 9th consecutive month, down 28% over the last year. This is the largest YoY decline since February 2008.
-The median price of an existing home sold in the US has now fallen 8% from its peak in June, the largest 4-month % decline since November 2008 to February 2009. After the last housing bubble peaked, prices fell 33%. Incredibly, the same decline today would only bring prices back to February 2020 levels.
2) The Earnings Recession
Housing is not the only downturn we’ve seen this year.
With 95% of companies reported, S&P 500 Q3 GAAP earnings are down 10% year-over-year, the 2nd quarter in row of negative YoY growth. And if current guidance/estimates are correct, we’ll likely see this trend continue in Q4.
The big question is what happens after that, as stocks have already moved lower this year in tandem with earnings. Will earnings bounce back in 2023 as is currently expected (13% earnings growth), or will the downturn continue?
3) Fully Inverted
The best argument for a deeper decline in earnings is that the US recession debate will finally be resolved in the coming months with a clear economic downturn.
On the top of the list of leading indicators pointing to future economic weakness is the yield curve, which is now fully inverted.
The shortest maturity 1-month Treasury bill yield (3.93%) rose above the longest maturity 30-Year Treasury bond yield (3.89%) last week, a relatively rare occurrence.
The last 2 times that happened?
-August – September 2019 (recession started in March 2020)
-August 2006 – August 2007 (recession started in January 2008).
In addition to the yield curve, many other leading indicators (housing, ISM new orders, stocks, etc.) are pointing to a weaker economy.
As a result, the 6-month growth rate in the Leading Economic Index fell further into negative territory in October and is at levels that have signaled a high probability of recession in the past (2020, 2008, and 2001).
4) Hitting the Brakes
Meanwhile, the Fed continues to hit the brakes, something we haven’t seen in a bear market since the early 1980s.
The Fed’s balance sheet is now at a 52-week low for the first time since December 2019, down $340 billion from its peak in April and $133 billion over the last 5 weeks. This is the largest 5-week decline since July 2020.
The Fed’s balance sheet is now 3.8% below its April peak.
The 2 largest drawdowns over the last 20 years?
-Dec ’08 – Feb ’09: -18.2% (balance sheet hit new high in Jan ’10).
-Jan ’15 – Aug ’19: -16.7% (balance sheet hit a new high in Mar ’20).
5) Disney’s Drawdown
Speaking of drawdowns, Disney’s hit 57% recently, which is larger than its drawdown from the 2007-09 bear market (-56%). That was enough, apparently to warrant a change in leadership, with Bob Iger returning as CEO.
What happened? Reversion to the mean in its purest form. During the 2020-21 mania Disney was bid up to a 6x price to sales ratio (P/S), by far the most extreme valuation in its history. After the decline, its P/S ratio now stands at 2x, which is back below its historical average.
Disney ($DIS) is the 2nd worst performer in the Dow this year, trailing only Salesforce ($CRM).
6) Persistent Negativity
There’s been no shortage of things to worry about this year (rising rates/inflation/fed tightening/earnings declines/nuclear war/etc.), with bad news far outweighing anything positive. This has impacted sentiment polls in a meaningful way.
Two examples:
-Bears have now outnumbered Bulls in the AAII sentiment poll for 34 consecutive weeks (since April 7). With data going back to 1987, this ties February – October 2020 (also 34 weeks) for the most persistent negative sentiment that we’ve seen in this poll.
-The University of Michigan’s Consumer Sentiment Index has been below 60 for 7 consecutive months, the longest run of extreme negative sentiment that we’ve seen with data going back to 1952. The prior record was 4 straight months during the 1980 recession.
7) Buying on Credit
Despite negative consumer sentiment, US Retail Sales still appear to be booming, rising 7.5% over the last year and hitting a new high in October. But after adjusting for inflation, the story changes. Real Retail Sales peaked in March 2021 and are down 0.3% over the last year.
Given the wide gap between inflation and wages, how has the US consumer been able to maintain their spending? They’re borrowing more and saving less.
-Credit Card balances in the US increased 15% over the last year, the biggest jump since the 2001 recession.
-Savings rates are down to 3%, their lowest level since the 2008-09 recession.
8) Commodities and Cash
It’s been a sea of red this year for most asset classes, with the notable exception of Commodities (+21.1% YTD, $DBC ETF) and Cash (+0.9% YTD, $BIL ETF).
Bitcoin, the best performer in 2019, 2020, and 2021, has been the worst performer this year (-65%).
Bitcoin’s 77% drawdown over the last year is its largest since 2017-18 and at 364 days is now the 2nd longest, trailing only the 2013-15 decline of 410 days.
9) WHAT HAPPENED?
Sam Bankman-Fried (aka “SBF”, former CEO of FTX) started a bizarre tweet thread with that question, and then proceeded to never say what actually happened.
So what did happen?
In the words of newly appointed FTX CEO John Ray III, “a complete failure of corporate controls” and “complete absence of trustworthy financial information” the likes of which he had “never seen in his 40 years of legal and restructuring experience.”
Ray also stated that a “substantial portion” of the assets held with FTX “may be missing or stolen.”
This, of course, is a crime, and all signs appear to be pointing to one of the biggest frauds in history.
Incredibly, only a few weeks ago SBF sent the following balance sheet to investors in a desperate attempt to raise more money.
Needless to say, there was no interest. You could write a book detailing the liquidity mismatches and questionable line items in there, but in short, the math doesn’t add up to anything good.
Two of the most egregious items:
-A $2.2 billion asset in a crypto token created by FTX called “Serum ($SRM),” which had a total market capitalization of roughly $100 million at the time.
-A side note for an $8 billion liability which was not included in the liability section and had the following description: “Hidden, poorly internally labled ‘fiat@’ account.”
10) The Used Car Bubble is Finally Bursting
The used car bubble is finally bursting, with the price declines accelerating over the last two months.
The Manheim Used Car Index is now down 14% over the past year, the largest YoY decline on record with data going back to 2009. This was a leading indicator of higher inflation rates in 2020 and the recent downturn is likely a leading indicator of lower inflation rates to come.
Another big positive on the inflation front that hopefully continues: fertilizer prices peaked in late March and are down 39% since, now at the lowest prices since September 2021. This is great news given their high correlation to food prices.
Lastly, global container freight rates are at a 23-month low, down 73% from their peak. While this is still 2x higher than pre-pandemic levels they continue to move in the right direction.
And that’s it for this week.
Have a great week everyone and Happy Thanksgiving!
-Charlie
To sign up for my free newsletter, click here.
Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.
