The Week in Charts (8/12/24)
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The most important charts and themes in markets and investing…
1) The Monday Morning Panic
The Monday morning panic on August 5th didn’t last very long.
In fact, if you didn’t follow the financial news last week, you would have assumed that it was one of the most boring week’s ever.
The S&P 500, which was down over 4% early Monday morning, would end the week down just 0.04%.
The reversal in the Volatility Index ($VIX) was even more stunning.
After hitting a high of 65.73 on Monday morning, the $VIX would end the day at 38.57. That 41% decline was the largest peak to close move ever.
And yet, the $VIX still ended Monday 136% higher than where it was just 3 trading days earlier, one of the biggest short-term spikes in history.
But when it comes to volatility, mean reversion is a powerful force. And over the the next 4 trading days the $VIX would decline 47%, its largest 4-day decline ever.
The $VIX ended the week at 20.37, 13% lower than its close the week before.
2) A Huge Sentiment Swing
The swift 10% pullback in the S&P 500 was enough to move a number of investors out of the bullish camp.
Just two weeks ago, we saw the highest percentage of bulls in the Investors Intelligence Index since 2020: 64.2%. That was an extreme reading, above 97% of historical data points. But last week the percentage of bulls moved down to 46.9%, which is right around the historical average. The 17% 2-week drop in the percentage of Bulls was the biggest sentiment swing we’ve seen since the October 1987 crash.
3) Is Buffett Turning Bearish?
Speaking of sentiment, many are interpreting Berkshire Hathaway’s Q2 earnings update as an indication that Warren Buffett has turned bearish.
Why?
Because Berkshire’s Cash Pile spiked to a new all-time high of $277 billion, increasing by a record $88 billion during the 2nd quarter. $75 billion of that came from stock sales with Berkshire selling nearly half of its position in Apple.
Berkshire Hathaway is now holding 25% of their Assets in Cash, the highest percentage since 2004 and well above its historical average (14%).
Why is Berkshire raising cash and reducing its position in Apple so aggressively?
One reason may be to lock in huge capital appreciation gains before tax rates increase, as Buffett alluded to in May, saying he thinks “higher taxes are quite likely” because of “present fiscal policies.” They’re currently paying a 21% tax rate but Buffett noted that it wasn’t that long ago when they were paying 35% and they’ve paid as high as 52% in the past.
But I don’t think taxes tell the whole story. Buffett is known as the most famous “value” investor of all time, and when it comes to valuation Apple is in a very different place today as compared to when Buffett first bought the stock back in 2016.
Its price to earnings ratio has moved from below 10x to above 30x and its price to sales ratio has moved from 2x to 9x (the highest in company history).
Which is another way of saying that its share price gains (+859% over the last decade) have far outpaced its fundamental growth (+158% increase in net income and +111% increase in revenues) and that a “value” investor might view that fact as a reason to reduce their position.
So does Berkshire’s high cash position mean that Buffett is bearish? I don’t know, but it seems reasonable to infer that he’s certainly less bullish today than he’s been in a long time. He’s following his own advice, being fearful when others are greedy. And by raising cash today, he can be greedy in the future when others become fearful.
4) High Yield Bonds: Not Close to Pricing in Recession
A few weeks ago, US High Yield credit spreads were near their tightest levels since 2007 (302 bps). During the 10% S&P 500 correction, spreads increased by as much as 91 bps to their widest levels since November 2023 (393 bps).
Is this a sign that bond investors are starting to price in a recession?
It doesn’t appear to be just yet.
The last 3 recessions in the US all saw credit spreads move over 1,000 bps at some point. We’re not even close to that scenario today, with credit default expectations remaining extremely low.
This is interesting because I ran a poll on X last week asking about the US economy and 29% said we are already in a recession today. Another 33% said we’re about to enter a recession (in the next 6 months) while just 38% said the expansion will continue.
5) Rising Credit Card Delinquencies
What would push the economy into a recession?
Weakness in the US consumer which account for roughly 70% of GDP.
What’s been keeping many of those consumers afloat in recent years is rising credit card debt, which hit a record $1.14 trillion in the 2nd quarter. That was an increase of 10.8% from the year before.
But more alarming has been the upward trend in delinquencies. 11% of credit card balances in the US are now 90+ days delinquent, the highest since 2012.
6) Commercial Real Estate Downturn
Higher interest rates and the big shift to a hybrid working environment (hurting office buildings and urban retailers) continue to hit the commercial real estate market.
US commercial property foreclosures rose to $20.55 billion in the 2nd quarter, a 13% increase from Q1 and the highest total since 2015.
A crazy stat: “State Farm Life Insurance recently conducted a foreclosure sale of an office building a few blocks from the White House for $17.6 million, more than 70% below what the owner had paid in 2010.” – WSJ
The delinquency rate on CMBS loans for office properties has moved from under 2% in 2022 to over 8% today. This is the highest delinquency rate we’ve seen since 2013.
7) Solidifying a Fed Rate Cut
At this point, a September Fed rate cut seems like a done deal. The only question is whether they will move 25 bps (to 5.00-5.25%) or 50 bps (to 4.75-5.00%) and the market is currently split evenly between the two in terms of probabilities.
Helping solidify the Fed’s case for a cut: the move lower in gas prices and inflation expectations…
- Gas prices in the US have moved down to $3.45 per gallon (national average) from $3.82/gallon a year ago (a 10% decline). If this holds, it will likely be a big factor in pushing down headline CPI for August (Cleveland Fed is currently forecasting 2.7%).
- Market-based inflation expectations moved down to 1.89% last week, their lowest level since December 2020 (5-year breakevens).
- According to the latest NY Fed survey, US Consumers are expecting inflation to average 2.33% per year over the next 3 years. That’s the lowest level on record with the survey dating back to June 2013.
8) A Few Interesting Stats…
a) Apple has bought back $646 billion in stock over the past 10 years, which is greater than the market cap of 491 companies in the S&P 500.
b) The Personal Savings Rate in the US has moved down to 3.4%, the lowest since 2022. The average over the last 30 years: 5.8%.
c) Amazon’s AWS revenue over the last 12 months ($99 billion) was higher than the revenue of 468 companies in the S&P 500.
d) “California households owed $2.1 billion in unpaid utility bills at the end of 2023, more than 4x the amount in 2019. Around 27% of Californians have missed payments on utility bills in the past year, one of the highest percentages in the US.” – WSJ
e) The Semiconductor Index closed below its 200-day moving average last week for the first time since November 2023. The 23% drawdown off of its July peak was the largest correction for Semis since 2022.
And that’s all for this edition. Have a great week everyone!
-Charlie
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