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This week’s post is sponsored by YCharts. Mention Charlie Bilello to receive a free trial and 20% off your subscription when you initially sign up for the service.
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The charts and themes from the past week that tell an interesting story in markets and investing…
1) Houston, We Have a Problem
The spread between 3-month (5.14%) and 1-month (3.36%) Treasury yields has never been higher: 1.78%.
What’s going on here? There a number of theories going around, but the one that’s gaining the most traction seems to be concerns about a US debt default due to the debt ceiling…
The cost to insure against a US debt default has risen to 90 bps, a record high.
Is the US actually going to default in the next few months? Of course not. They’ll raise the debt ceiling and borrow more money like they always do.
But investors aren’t always rational, and there’s been a huge spike demand for the shortest-term Treasury security (1-month), driving its yield down to 3.36%.
Will this dip in 1-month yields last for long? I highly doubt it, unless the Fed is suddenly going to cut rates aggressively at its next meeting.
That’s not what the market is expecting at all, with the odds of another rate hike moving up to 89% this week. Historically, the 1-month has closely followed the Fed Funds Rate, meaning it should be over 5% in May.
2) The Housing Shortage
There’s a major shortage of US houses available for sale.
How did we get here?
The simplest explanation is that the growth in households over the last decade has far outpaced the construction of new homes. This has led to a deficit of 6.5 million homes if we just look at single-family and 2.3 million if we include multi-family (data via realtor.com).
While the number of homes being built has increased each and every year since 2012, the numbers still fell short when compared to household formations.
And after the spike in mortgage rates last year, housing starts plummeted, meaning completions in 2023 are likely to to be down sharply. Housing starts are 17% lower than a year ago, the 11th consecutive month with YoY declines. This is now the longest down streak since 2009.
But there’s some signs that we may see more building in the coming months.
The US Housing Market Index rose for the 4th consecutive month, reflecting increasing homebuilder confidence. Their reason for growing optimism: a lack of existing supply, with new construction representing 33% of current housing inventory versus a historical average of a little over 10%.
With new homes representing a much larger share of inventory, homebuilders have less competition from existing homes and more demand from buyers.
And the markets have been reflecting this…
The US Home Construction ETF ($ITB) is at a 52-week high, up 25% over the last year.
The leading homebuilder stocks are all up 30-50% over the last year versus a 5% decline for the broader S&P 500.
Which suggests investors are expecting these builders to build a lot more going forward. Are they correct? I hope so. An increase in the supply if housing is desperately needed.
3) Housing: Slowly Repricing
More homes being built would certainly be a welcome development for homebuyers, with housing affordability still at record lows. The mortgage payment needed to buy the median priced home for sale in the US has moved up to $2,538, a new all-time high.
The adjustment in prices has been very slow thus far, with year-over-year sale prices just starting to turn negative.
Still, according to Redfin, the 3.3% decline we’ve seen over the past year is the largest since 2012.
Is that enough to boost demand?
No.
US Existing Home Sales were down 22% over the last year, the 19th consecutive YoY decline. That’s the longest down streak since 2009.
Interestingly, biggest declines in YoY home sales are in the high-end market (home prices >$1M).
4) Rising Recession Risks
While the housing market is clearly in a recession, the debate over the broader economy continues. But the risks of a recession seem to be increasing with each passing month.
The YoY growth rate in the Leading Economic Index fell further into negative territory in March and is at levels that have signaled a recession in the past (2020, 2008, and 2001).
The Philly Fed Manufacturing Index has moved down to -31, its lowest level since May 2020. In the past, every time this indicator was at or below current levels the US economy was either in or approaching a recession.
5) Narrowing EV Credits
If you’re in the market for a new EV, the WSJ had a great graphic summarizing the new requirements to qualify for a sizable tax credit ($7,500 or $3,750 depending on the model)…
The Treasury department recently announced much stricter requirements on where the battery parts and minerals much come from, leading to a decline in the number of models that qualify from 25 to 16. No foreign brands are now eligible for the credit.
In order to qualify for the credit, Tesla had aggressively cut prices over the past few months.
That’s led to margin compression (from 29% in Q1 2022 to 19% in Q1 2023) and a decline in 24% decline in profits.
Revenue growth of 24% was the slowest since Q2 2020.
6) Netflix Numbers
Netflix Q1 revenues were 3.7% higher than a year ago, the second lowest YoY growth rate in company history (lowest was in Q4 2022).
Net income came in at $1.3 billion in Q1, an 18% YoY decline. Operating margins fell from 25% to 21%, which was blamed on currency effects (appreciating US dollar).
After many years of rapid growth, the company is having a much harder time adding new subscribers…
7) Irrational AI Exuberance?
Nvidia is the dominant player in AI chips (88% market share) which has sent its stock soaring in recent months (+85% year-to-date). In terms of potential demand, one estimate suggested that 30,000 Nvidia chips will be needed to commercialize ChatGPT, and these chips are currently selling for over $40,000 on eBay.
That’s a lot of potential revenue and profits, but are investor expectations too high?
You tell me. The stock ($NVDA) is trading at 26x sales and 160x earnings.
Nvidia’s market cap is now over $100 billion higher than Facebook ($META). Meanwhile, Nvidia had $4 billion in net income over the last year (down 54% YoY) vs. $23 billion for Facebook (down 38% YoY).
8) Crazy for Crocs
Crocs revenues have doubled over the past two years and tripled over the past 4 years. Its stock ($CROX) is at a 52-week high, up 98% over the last year.
9) Big Banks > Small Banks
The big banks all reported earnings last week, with JPMorgan Chase ($JPM) leading with a 52% increase in net income and 49% increase in net interest income.
JPMorgan was said to be the largest beneficiary of the regional bank outflows stemming from Silicon Valley Bank failure, with an estimated $50 billion increase in deposits.
Its stock has gained 6% this year versus a 27% decline for the Regional Bank ETF ($KRE).
10) Public Pessimism
CNBC’s latest All-America Survey had some interesting results:
-69% of the public was negative on the US economy, both now and the future. That was the most pessimism in the survey’s 17-year history.
-24% said now is a good time to invest in stocks, the lowest reading in the survey’s history.
One would think with this amount of negativity that stocks would be crashing, but to the contrary we’ve seen the S&P 500 gain 8% thus far in 2023 with the Volatility Index ($VIX) moving down to its lowest levels since November 2021.
11) Tax Stats
The 43% of US income tax filers earning $50k or less make up 10% of total income and pay -4.8% of federal income taxes (negative because they get a refundable credit on average). The 10% of taxpayers earning $200k or more earn 44% of total income and pay 80% of federal income taxes.
Here are the average effective federal income tax rates by income ranges…
Individual income taxes provided 54% of US federal government revenue, more than any other source (via WSJ).
12) The Bank of Apple
Apple just launched a new high-yield savings account (via Goldman Sachs) with a 4.15% yield. While that’s lower than most money market mutual funds and the highest online savings account yields, its much higher than the average savings account yield of just 0.24%.
I’m guessing they will see significant demand for this product as the convenience factor for US consumers is huge. Many people are still earning 0% in checking accounts due primarily to inertia. With minimal effort they can now bump that up to 4.15% and do so with a company they already trust with their phone/tablet/pc/watch/wallet. Seems to be a smart move by Apple here, incentivizing users to sign up for their Apple Card (required to be eligible for the savings account) and further extending the enormous Apple ecosystem into banking.
And that’s it for this week. Have a great weekend!
-Charlie
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