Friday Highlight Reel - Edition #13
A sampling of interesting observations from the Haymaker's network of market experts and favorite resources.
(Directly quoted content appears in block-quote format, unless otherwise indicated)
#1: Fred Hickey, Author of The High-Tech Strategist, Citing The Wall Street Journal:
Tech stocks have climbed this year in part because investors are betting the Fed will soon pause its interest-rate-raising campaign or even cut rates later this year. They even rallied last month during the crisis in the banking sector, helping to keep the broader market afloat. The S&P 500 is up 8% in 2023, but without the contribution of eight megacap tech companies, it would be down for the year, according to Bianco Research data through Wednesday.
Team Haymaker Take: The narrowness of the U.S. stock market’s leadership has been a regular Haymaker topic in recent months. Yet, despite all I’ve read on this phenomenon, I have to admit the above factoid, relayed by my friend Fred Hickey, caused me to do a double take. (Somehow, I missed the original WSJ article).
As noted, excluding those nine mega-cap tech (or quasi-tech*) stocks, the S&P 500 would be down 0.5% instead of up around 8.5%. That’s worrisome enough, but the concentration described above is even more concerning. Basically, it’s an extension of the FAANG phenomenon that has been the primary driver of the U.S. stock market’s world-beating returns for the last five years, with 2022 being a rare break in that pattern.
Retail investors’ love affair with these issues is so intense right now that it is destined to have its heartbreak moment, probably in a pronounced fashion. If you think that can’t happen, take a look at their stock charts from last year. (For a discussion of what could catalyze another cave-in by this dream team, please check out next week’s Making Hay Monday edition.) The history of retail investors crowding into favored names is a long one. Such obsessions tend to reinforce themselves, driving prices to ever more unsustainable levels. As a result, the ultimate reckoning becomes even more painful. Frankly, institutional investors also tend to get sucked into never-sell mindsets as well. Presently, the sex appeal of AI is proving irresistible for even some of the world’s brightest money managers, causing them to also crowd into several of the ultra-fine nine. Maybe I’m wrong, but it seems overdone to me.
* Amazon and Tesla are not considered technology stocks by S&P; however, they typically trade in sync with their “pure tech” peers. A further footnote is that Evergreen owns some of these names for its clients, often because they were much cheaper when initially acquired; accordingly, clients have significant capital gains liabilities. Usually, though, we hold much less in our accounts than their current weighting in the S&P.
#2: Per David Rosenberg, Canada’s Leading Economist
Small business makes up two-thirds of the economy, how we get out of this without a classic recession is beyond me. This credit squeeze is just getting started — all that’s left to decide is the duration and severity…The New York Fed Empire manufacturing index sank to a four-month low of -31.8 in May from +10.8 in April and radically undercutting even the downbeat consensus estimate of -3.9. The index has been in contractionary sub-50 terrain in four of the past five months and the latest reading was the second worst since May 2020. The components were so horrid, that the ISM equivalent tanked from 54.9 in April to 43.5 in May — that is the worst showing since May 2020; and prior to the pandemic, try May 2009; and before the Global Financial Crisis, December 2001.
And hot off the Rosenberg press this morning:
The Conference Board’s index of leading economic indicators (LEI) slumped 0.6% in April, in line with consensus views and down an epic thirteen consecutive months. We are following the exact same pattern that began in April 2007. We simply never see a string of declines like this without seeing a recession.)
Team Haymaker Take: As David Rosenberg indicates, small businesses are crucial to the U.S. economy. This makes it particularly unfortunate that they have been collateral damage from the latest banking crisis. With deposit flight hitting myriad community and regional banks, causing their senior loan officers to turn off the lending spigots, the financing situation for countless smaller enterprises is becoming dire. Unlike Fortune 500 companies, smallish firms lack the ability to access the corporate bond market where the cost of money is much less onerous. Meanwhile, most of the other big-picture economic data continue to deteriorate, such as the NY Fed Empire Survey David describes above. However, there are definitely some reports that indicate the U.S economy is in decent shape. This may be the most confusing time I’ve ever experienced when it comes to reading the economic tea leaves. Nonetheless, it remains my view that a recession in the near future is more likely than not. The funding struggles small businesses are now facing only reinforce my concerns.
#3: Yahoo! Finance on Consumer Debt
The share of folks falling behind on credit card and personal loan payments is increasing, several reports found, especially among the riskiest of borrowers.
The "delinquency transition rate" for credit cards—the share of credit card debt that is 30 days or more past due—increased by 0.6 percentage points during the first three months of the year, according to a Federal Reserve Bank of New York report released Monday. That's approaching pre-pandemic levels.
That echoes last week’s first-quarter report from credit bureau TransUnion, which found that delinquency rates increased year over year on credit cards and unsecured personal loans.
The rise in missed payments is prompting lenders to pull back on their looser lending requirements. But, they’re keeping a common recession countermove, reducing credit limits, at bay for now.
“We have seen fairly material increases in delinquency rates, in decent part attributable to so many originations in the second half of 2021 into 2022 were to riskier borrowers in below prime risk tiers,” Charlie Wise, TransUnion’s senior vice president of research and consulting, told Yahoo Finance. “They have been true to their credit scores and have higher delinquency rates.”
Team Haymaker Take: It seems like not long ago, all anyone could talk about was how much savings the average U.S. consumer had in their bank account. Government stimulus payments, combined with Covid restrictions that kept people from going out and spending, had seriously padded personal balance sheets. Fast-forward a couple years and the script has completely flipped. Credit card balances are hovering around all-time highs and Americans are struggling to keep up on their payments for autos, credit cards, and mortgages. In fact, TransUnion recently reported that credit card balances alone are up 20% year-over-year. Speaking of 20%, that’s also the average interest rate on what is now one trillion of aggregate credit card debt!
The fallout from regional bank failures hasn't helped matters, either. Many financial institutions are tightening the screws even more when it comes to lending requirements for auto, credit card, and other personal loans. (Combined with the preceding section, are you getting the sense of an escalating credit crunch?)
But one mystifying element of the U.S. economy continues to prop up the lending structure: historically low unemployment. Were that Jenga piece to fall out, the whole thing may come crashing down. Some economists seem unfazed by the darkening economic skies, given the strong labor market. We, however, are less confident in the resiliency of job growth, given the long list of headwinds facing the U.S. economy.
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#4: AP on AI Cautions
The head of the artificial intelligence company that makes ChatGPT told Congress on Tuesday that government intervention will be critical to mitigating the risks of increasingly powerful AI systems.
“As this technology advances, we understand that people are anxious about how it could change the way we live. We are too,” OpenAI CEO Sam Altman said at a Senate hearing.
Altman proposed the formation of a U.S. or global agency that would license the most powerful AI systems and have the authority to “take that license away and ensure compliance with safety standards.”
His San Francisco-based startup rocketed to public attention after it released ChatGPT late last year. The free chatbot tool answers questions with convincingly human-like responses.
What started out as a panic among educators about ChatGPT’s use to cheat on homework assignments has expanded to broader concerns about the ability of the latest crop of “generative AI” tools to mislead people, spread falsehoods, violate copyright protections and upend some jobs.
Team Haymaker Take: The media spotlight this week is once again shining on ChatGPT and AI. In what feels like a "How do we let the genie out of the bottle without letting it out of the bottle?" situation, it appears that particular chatbot's creators are well aware of the potentially deleterious effects of the technology were it to be unregulated. OpenAI CEO Sam Altman appeared before Congress on Tuesday to address these concerns and expressed that the company shares them, too. Not sure if that makes us feel better or worse…
When you sit down and really think about it, the software's impact on jobs lost, data security, and misinformation implications are probably beyond the scope of what our minds can even currently comprehend. (BT, the former British Telecom, just announced it’s laying off 40% of its workforce due to AI “efficiencies”.) Not to mention, this technology is still in its infancy and will continue to advance and evolve at exponential rates. What does this look like for mankind 10-20 years down the road? The good news is many intelligent people are trying to apply lessons learned from the proliferation of social media and trying to get ahead of the wide-ranging fallout of such powerful tech on human society as we know it. To say time will tell is putting it mildly.
#5: The Daily Mail on Poorly Timed Tropical Getaways
Former Silicon Valley Bank CEO Greg Becker defended his decision to flee to the tropics following the shock collapse of the bank he ran in early March.
During a Tuesday hearing with the Senate Banking Committee, Becker told a panel of senators that he and his wife 'made a decision - we decided we were going to go to one of two places to be with family.'
'Either we would be with my family in Indiana or her family in Hawaii. We decided to go to Hawaii,' he said.
Becker and his wife, Marilyn Bautista, fled to their $3.1million Maui townhouse mere days after Becker, who had been the CEO of SVB since 2011, was terminated.
The ex-CEO reported cashed in 12,500 stock shares for close to $3.5million just two weeks before the firm very publicly collapsed.
Team Haymaker Take: It just doesn’t look good, does it? Unfair or otherwise, the notion of a CEO making his way to paradise while his proverbial capsized ship has not yet slipped below the surface… well, it doesn’t do much to inspire nationwide trust in our major banking institutions — again, unfairly or otherwise. And these days, citizens are looking for reasons to mistrust “Big Everything” — government agencies (see below), news outlets, universities, and, yes, massive banks. The small ones seem to be in good standing with John Q. Public. With poorly timed (or conceived) actions like those of Mr. Becker, Americans don’t need to look far for reasons to feel disdain for powerful folks whose failures are felt a few rungs down the ladder, rather than by the individuals responsible. In the interest of a balanced understanding, The Wall Street Journal did ask the following in a recent SVB analysis:
Bank executives aren’t blameless, but they were also responding to the Fed’s easy money and misplaced regulatory priorities. Mr. Becker has lost his job and no doubt a lot of money. Has even a single regulator at the San Francisco Fed?
Emphasis is ours.
Again, the matter these days is one of institutional trust, not enmity strictly towards and for bankers. If a senior regulator from the Federal Reserve Bank of San Francisco was seen (and recognized) en route to Hawaii while an institution they were meant to be auditing was in disarray, we imagine the outcry would be comparable to what Mr. Becker experienced.
#6: Spectator Australia on Green-Movement Overreach
In early May, the European Commission gave the green light for the Dutch government to start buying out farms to meet the EU’s climate targets. The EU’s 2021 European Climate Law set a goal of reducing greenhouse gas emissions by a minimum of 55 per cent by 2030, less than 7 years from now.
To meet this impracticable goal, the Dutch government has decided to target their farmers, blaming them for high greenhouse emissions. Dutch estimates suggest that up to 3,000 farms will have to be closed down. The government is offering buy-outs, with force-outs likely if they refuse. This radical policy is despite that the Netherlands only contributes 5.2 per cent of EU emissions, and that its emissions have reduced by 13.4 per cent between 2005 and 2019. Agriculture only makes up 9 per cent of Dutch greenhouse gas emissions, and its emission has been falling, even as its income increases.
In response, in an eerie echo of Houellebecq’s novel, Dutch farmers have been driven to protest en masse. In March, more than 10,000 farmers and their supporters gathered to protest in The Hague, days after similar protests by Belgian farmers, who blockaded Brussels with thousands of tractors, against plans to drastically limit emissions.
The Dutch policies are particularly puzzling, as Dutch farmers are among the most efficient in the world. The Netherlands, a tiny country both in terms of land and population, is nevertheless the second largest food exporter in the world, after the US, a country infinitely larger and with around 20 times the population. It has achieved this amazing feat by being a leader in agricultural technology innovation, as acknowledged even by the World Economic Forum, which is itself a leader in the push of the extreme green agenda. It is therefore mind-boggling that the Dutch government and the EU would want to uproot this industry rather than to promote and emulate it in a world that is running out of food.
As if to emphasise the EU’s foolishness, there is a condition for farmers who accept the buy-out, which is that they are not allowed to start another similar operation in any EU country, obliterating their world-class expertise and knowledge. Imagine being told by your government that your hard-earned skills cannot be used to make a living again, not only in your own country, but in your continent.
Team Haymaker Take: Those of you who’ve been following the Haymaker since its earlier Evergreen Virtual Advisor (EVA) incarnation will know that so-called “greenflation” has been a target of criticism in these pages for years. At the heart of that fault-finding has always been the disconnect between the Green Movement’s almost always preposterous “climate-saving” goals and the physical world and dynamic economy in which we actually live. On an international level, the disconnect is made especially clear when you consider that major pollution sources are found in developing nations which most of the developed world has no intention of seriously regulating. So, to compensate for a lack of regulation interest in, say, China and India, the EU has elected to make an example of a nation the size of a Six Flags amusement park, one whose farmers seem as spiritually intertwined with their ancient profession as the country and much of Europe are objectively dependent on their crops. Their aim of hollowing out an agricultural sector which, as The Spectator notes, is famous for its efficiency and ingenuity, is immoral and absurd, but admittedly unsurprising. We wish the Dutch farmers unmitigated success in their revolt against the foolishness of bureaucrats who seemingly know nothing about the lands they seek to rule. This is a topic which the American media has been content to mostly ignore. A few independent channels/personalities, such as The Hill and Jimmy Dore, have run segments on the protests, but it deserves far more coverage, as the mindset that led EU types to author such moronic policies can easily take root here.
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I think what is happening to the Dutch farmers is criminal!
I had the privilege of listening to a very highly regarded Professor from one of the top Agriculture colleges in our country recently.
He presented a series of statistics indicating that the method currently used to calculate carbon inputs and outputs for crop production is seriously flawed.
The problem is that the growth of the plants and the carbon sequestered by these agricultural crops that ingest CO2 as they grow is not properly accounted. It is based on an arbitrary decision made by the climate "powers that be" to ignore a key part of the carbon cycle when measuring CO2. When you factor in all the actual CO2 inputs and outputs from these commercial agricultural operations on an all in basis, the use of Nitrogen fertilizer as part of a modern agricultural operation is actually a net positive. The increased plant growth from the optimum use of fertilizer combined with our efficient current commercial farming practices sequesters more carbon in the plants that are grown and the crops that are produced than the negative impacts from modern commercial agricultural practices.
In short the entire movement to restrict nitrogen and stop this efficient commercial farming is based on a lie.
It is time to stop this Malthusian madness!
Dear Haymaker,
Thank you for your paragraph re the Dutch Farmers' revolt -- spot on, concise, terrific writing and a thoroughly enjoyable read.
Very best,
Farid