Just when you think that housing-related data can’t get any worse, the December report on homebuilder sentiment came in with a big stinker.  After last month’s report where the actual level missed expectations by seven points, today’s report for December missed estimates by four points with a reading of 56 compared to expectations of 60.  Combining the declines of the last two months, homebuilder sentiment has now dropped by a total of 12 points, which is the second largest two-month drop in the history of the report.  Not even during the housing crisis did sentiment drop at this fast of a rate, and the only time it dropped faster was in the two months that followed the 9/11 attacks.

The chart of the actual level of the NAHB Sentiment index doesn’t look pretty either.  Following this month’s decline, the index is at its lowest level since May 2015.  One thing to take note of with regards to the NAHB Housing Index, though, is that peaks haven’t historically been associated with the onset of recessions.  At the start of each of the last three recessions, this index was well past its peak by a matter of years rather than months.

The chart below shows the breakdown of this month’s report by traffic and region.  We saw broad-based declines in traffic trends in December, and the bulk of the weakness came in the Northeast.  Sentiment in that region dropped by 15 points, which was the largest one month decline since June 2011 and capped off the largest two-month decline on record.  It was said a year ago that the Trump tax cuts would have the greatest negative impact on housing in the high tax states of the northeast, and recent data has borne this out.

While homebuilder sentiment in the northeast has seen the sharpest declines, the trend is the same around the country- sentiment has peaked.

As mentioned above, homebuilder sentiment hasn’t been strongly correlated to trends in the business cycle over time, and with respect to stock market performance, that has been the case as well.  Leading up to each of the prior bear markets in the last twenty years, homebuilder sentiment peaked well over a year before the market peak.  While not pictured below, we have also seen similar trends play out in prior bear markets since 1985 (when the NAHB survey data begins).

Last week’s economic data came in somewhat disappointing with a little less than half of the 30 releases below estimates or the previous period’s reading.  JOLTS kicked off the week still strong and higher than the September reading, but below estimates.  Small business optimism saw a decline for November.  Inflation data through PPI and CPI both came in mostly in line with forecasts with core PPI being the only measure to release above estimates.  However, export and import price indices both came in well below October’s levels.  Jobless claims saw a substantial beat.  Despite a strong Industrial Production reading, preliminary Markit PMIs for manufacturing as well as services pointed to a weaker release for December.

This week will see a heavy slate of data.  Empire manufacturing didn’t start the week off on the best note with the index cutting nearly in half.  Homebuilder sentiment and TIC flows report later today.  Housing starts and permits are the only releases Tuesday, but Wednesday through the end of the week will be busy.  On Wednesday, the FOMC will have their rate decision where interest rates are expected to rise a quarter of a percent.  This will by far be the most talked about event of the week.  Thursday we will get the Philly Fed’s business outlook and the leading index.  There will be many releases to finish the week on Friday with The third GDP release, goods orders, personal income and spending, PCE inflation data, and the Kansas City Fed’s manufacturing activity.

The two charts below were published in our weekly Bespoke Report newsletter that went out to research clients on Friday.  They show long-term three-year price charts of two equity indices that are generally thought of as “leading” indicators — that is, they’re thought to lead the broader indices like the S&P 500.

Unfortunately for market bulls, both appear to be in serious trouble from a technical perspective.

As shown, the Russell 2,000 (small-cap) and Dow Transportation indices have recently broken below long-term uptrend channels, and they have yet to find any kind of support during this correction.  The Russell 2,000 is down 18% from its 52-week high, which puts it just two percentage points away from a new bear market.  The Dow Transports aren’t far behind.  The Transports index is down 17.4% from its 52-week high, meaning a bear market isn’t far away for this area of the market either.

Keep an eye on these two indices in the coming days and weeks as 2018 comes to an end.  If they slip into bear market territory, it’s not a good sign for the major indices like the S&P 500 and the Dow Jones Industrial Average.  For more analysis of leading indicators and market internals, try out one of our three premium research offerings.

Following Friday’s steep declines, our Trend Analyzer shows that every major index ETF is now oversold just like they were at this time last week.  Some of these, such as the Russell 2000 (IWM) and Core S&P Small-Cap (IJR), are deeply oversold.  Losses from last week also eliminated most YTD gains for these index ETFs.  The Nasdaq (QQQ) has been the best performer only falling 0.28% over the past week.  It is also the lone survivor in regards to YTD gains.  All other ETFs are now down on the year, with the Micro-Cap (IWC) being the worst of these down almost 10%.  With another down week, long-term trends have also gotten further beaten down with all but the Dow (DIA) moving into downtrends.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

While you’re here, join Bespoke Premium for 3 months for just $95 with our 2019 Annual Outlook special offer.

Big Calls

One of the Best Sell-Side Calls in History Is Over: Taking Stock by Arie Shapira (Bloomberg)

The first analyst to rate GE below neutral did so with almost perfect timing, with his change in rating almost perfectly timing a +70% drop in the market cap of the company. [Link, soft paywall]

Harvard Quietly Amasses California Vineyards—and the Water Underneath by Russell Gold (WSJ)

The largest college endowment has started rapidly gobbling up California vineyards sitting atop very valuable freshwater resources. [Link; paywall]

Labor Markets

Labor Market Considerations for a National Job Guarantee by Ryan Nunn, Jimmy O’Donnell, and Jay Shambaugh (The Hamilton Project)

A long review of possible labor market effects of a job guarantee. While total effects are uncertain, the paper highlights 27.9mm full-time workers, 15.9mm part-time workers, 5.9mm unemployed workers, and tens of millions of non-participants and estimates 2-4 percentage point contributions to the employment rate (along with hundreds of billions of dollars of costs). [Link; 37 page PDF]

Reducing the language barrier by Dan Mika (The Gazette)

Workers are scarce enough in Iowa that employers are offering free language classes to workers who don’t speak English as a way to attract labor resources. [Link]

Sports

My Dad’s Friendship With Charles Barkley by Shirley Wange (WBUR)

The story of a cat litter scientist’s friendship with one of the greatest – and most colorful – NBA players of all time, sparked by a random encounter in a Minneapolis hotel which led to a dinner and a lasting relationship. [Link]

‘Netflix of sport’ Eleven Sports could close UK site after just four months by Alex Netherton (Yahoo!)

A UK startup sought to distribute live sports via streaming, with low monthly subscription costs, but failure to strike a deal with the UFC led to the collapse of Eleven Sports. [Link]

Stumbling Startups

Robinhood Will Retool Checking Product Following Scrutiny by Julie Verhage (Bloomberg)

After announcing a new “checking and savings” product with an impressive 3% yield this week, people started asking questions about how Robinhood (the free stock trading company) was able to skirt regulation. The answer is they were not, and have since walked back the offering. [Link; soft paywall]

When the “best” busts: the spectacular rise and fall of smart luggage startup Raden by Chavie Lieber (Vox)

The story of how a first-mover in “smart luggage” completely flopped because it focused on sustainable growth over massive fundraising rounds and advertising spend. [Link]

Dr. Elon & Mr. Musk: Life Inside Tesla’s Production Hell by Charles Duhigg (Wired)

A tick-tock of the horrifying personal management, engineering deployment, and industrial design processes that have kept Tesla from achieving anything resembling profitability. [Link; soft paywall]

ISIS

Lund professor freed student from Islamic State war zone (The Local)

An Iraqi man studying at Lund University returned to the country in 2014 as ISIS threatened his family. When he got pinned down and had to go into hiding himself, the university dispatched a private security company to arrange heavily-armed mercenaries to extract the man and his family. [Link]

Media

How YouTube’s Year-in-Review ‘Rewind’ Video Set Off a Civil War by Kevin Roose (NYT)

An annual review of YouTube’s creative output put together by the company has sparked a massive controversy that pits some of the site’s creators against Alphabet’s interest as an advertising vendor. [Link; soft paywall]

Social media outpaces print newspapers in the U.S. as a news source by Elisa Shearer (Pew)

New data from Pew shows that roughly 1 in 5 Americas use social media to get news “often”, versus 16% for newspapers. TV (~half) is still the dominant form, while 1-in-3 use news websites. [Link]

China

China Sets up New Forex Reserve Investment Arm by Pen Qinqin and Shen Lu (Caixin)

A look at some new strategies reserve managers in China are using to invest the country’s $3tn of reserve assets. [Link; paywall]

Madoff

Lessons From the Bernie Madoff Fraud, 10 Years Later by Joel Arbaje (Barron’s)

A retrospective on how and why Bernie Madoff was able to start a $64bn Ponzi scheme, which is still being unwound 10 years later. [Link; paywall]

Regulation

Cuomo to release plan for legalizing recreational use of marijuana by Carl Campanile (NYP)

The New York governor is planning a measure to make recreational marijuana use legal, which could generate nearly half a billion in new revenue for the state. [Link]

Fed, big banks on collision course over payments by Victoria Guida (Politico)

The US’s antiquated payment system (featuring slow, expensive, and cumbersome interbank transfers) is looking at the feasibility of building a real-time payments system. [Link]

Real Estate

There could be an unlikely place to hide out if a recession is coming: Housing by Yun Li (CNBC)

Despite housing market weakness in recent quarters, investors are hoping that home prices will hold up far better than equity or market prices in the next recession. [Link]

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Have a good Sunday!

Week 14 Results: 6-9, Overall 101-88 (53.4%)

Outside of financial markets, we’re also sports fans here at Bespoke.  With new legal sports betting avenues now available across the US, we figured we’d have some fun and pick each NFL game versus the spread this season.

On to the week 15 slate of Saturday, Sunday and Monday Night games:

2018 NFL Week 15 Bespoke Picks:

Houston (-7) at NY Jets: Houston -7

Cleveland at Denver (-1.5): Cleveland +1.5

Arizona at Atlanta (-9.5): Atlanta -9.5

Detroit at Buffalo (-2.5): Buffalo -2.5

Green Bay at Chicago (-5): Chicago -5

Oakland at Cincinnati (-3): Oakland +3

Dallas at Indianapolis (-3): Dallas +3

Miami at Minnesota (-7.5): Miami +7.5

Tennessee (-1) at NY Giants: NY Giants +1

Washington at Jacksonville (-7.5): Jacksonville -7.5

Tampa Bay at Baltimore (-7.5): Tampa Bay +7.5

Seattle (-3.5) at San Francisco: Seattle -3.5

New England (-2.5) at Pittsburgh: Pittsburgh +2.5

Philadelphia at LA Rams (-13): LA Rams -13

New Orleans (-6) at Carolina: New Orleans -6

2018 NFL Week 14 Bespoke Results:

NY Jets at Buffalo (-4): NY Jets +4 (Win)

Carolina (-1.5) at Cleveland: Carolina -1.5 (Loss)

Atlanta at Green Bay (-4.5): Atlanta +4.5 (Loss)

Baltimore at Kansas City (-6.5): Kansas City -6.5 (Loss)

New England (-7.5) at Miami: New England -7.5 (Loss)

New Orleans (-10) at Tampa Bay: Tampa Bay +10 (Loss)

NY Giants (-3) at Washington: NY Giants -3 (Win)

Indianapolis at Houston (-4.5): Indianapolis +4.5 (Win)

Cincinnati at LA Chargers (-14.5): LA Chargers -14.5 (Loss)

Denver (-3.5) at San Francisco: Denver -3.5 (Loss)

Philadelphia at Dallas (-3): Dallas -3 (Win)

Pittsburgh (-10) at Oakland: Oakland +10 (Win)

Detroit (-3) at Arizona: Detroit -3 (Win)

LA Rams (-3) at Chicago: LA Rams -3 (Loss)

Minnesota at Seattle (-3): Minnesota +3 (Loss)