🔬Nonfarm is Important, the 'S&P Phenomenon', and Much More
🔬Nonfarm is Important, the 'S&P Phenomenon', and Much More
"Time is your friend; impulse is your enemy"
- John Bogle
"Value investing is at its core the marriage of a contrarian streak and a calculator"
- Seth Klarman
Strong day for the major US markets with the S&P 500 (+0.80%) and Nasdaq (+1.37%) both up nicely.
8 of 11 sectors closed in the green today, with Tech (+1.3%) and techy Communication Services (+3.2%) crushing it. Energy (-0.6%) and Utilities (-0.2%) were the laggards.
Nonfarm payrolls today to be particularly important following weak employment figures this week (JOLTs and ADP Private Payrolls both missed).
AI back in the news cycle with Google (+5.3%) following its announcement yesterday that its Gemini AI model beats OpenAI's GPT-4 in multiple key tests; and AMD’s (+9.9%) announcement of new AI chip to compete against Nvidia’s dominance.
U.S. 30-year fixed mortgage rate decreased to 7.03% from 7.22% the week prior (Freddie Mac).
Bitcoin is still flying (+1.4%) and WTI Crude was flat (-0.1%) after Wednesday’s 4.1% drop.
Street Stories
ALL EYES ON NON-FARM PAYROLLS - Today’s November jobs report is expected to indicate a rise in job growth, with forecasts predicting 172.5k new nonfarm payrolls, up from an October 150k print. The market also expects a steady unemployment rate of 3.9%.
What is Nonfarm Payrolls? The U.S. Department of Labor releases their estimates for the number of employed persons in America every third Friday of the month. It excludes those employed in the military, private households, non-profits, and - you guessed it - farm workers, covering about 80% of the US workforce. It’s not the only economic indicators related to employment, but it is typically the most often referenced.
Today’s nonfarm (probably out by the time you read this) is particularly important because it follows a slew of other employment indicators that have all been pretty bad as of late: ADP Private Payrolls on Wednesday were up 105k in November, well shy of the ~120k Wall Street estimate. This followed Tuesday’s JOLTS which showed job openings declining for third straight month.
This report is significant for the stock market, as it could influence the Federal Reserve's decisions on interest rates, with investors currently expecting a halt in hikes and potential cuts in 2024. Recent data, including a decline in the job openings to unemployed workers ratio, suggests a cooling labor market, aligning with the Federal Reserve's goal of balancing worker supply and demand. Moreover, if things look too grim then that would pose significant risk to the stock market, as it risks the ‘Soft Landing’ (ie: modest to no recession) being more severe than current consensus believes.
AMAZON TO OFFER PRIME GROCERY DELIVERIES - Amazon, in its latest push to dominate every aspect of our shopping lives, is rolling out a $9.99 monthly grocery subscription for Prime members, offering unlimited Whole Foods and Amazon Fresh deliveries for orders over $35. It's a clever move to get Prime members to buy even more, now with the added convenience of never having to leave their homes for groceries. (CNBC has more)
(Pretty sure child labor laws came into their modern form after Billy Madison was released. Or because of it.)
UBER & THE ‘S&P PHENOMENON’ - Last Friday when it was announced that Uber would be joining the S&P 500, shares shot up +5.2% at the Monday open. That’s pretty wild; adding ~$6 billion in market cap just because you’ve been added to another index?
Turns out it’s actually a pretty common thing, often referred to as ‘The S&P Phenomenon’, and there is actually some good reason for it. The two main reasons are probably: 1) The inclusion in ETFs; and 2) Investment Funds with the S&P 500 as their benchmark.
Inclusion in ETFs: When a company gets added to an index, any ETFs that track that index need to go out and buy shares of the company equal to the expected weight that the company would hold at inclusion. As you can see below, the Top 3 S&P 500 ETFs manage around $1.2 trillion dollars. The S&P 500 has a market value of all listed companies of around $41 trillion so the inclusion of Uber - current market cap of $122 billion - would give it a 0.3% weight in the index. That means just the top 3 ETFs alone would need to go out and buy around $3.5 billion of Uber stock relatively quickly. That’ll move the price bigly.
Investment Funds with the S&P 500 as their benchmark: The impact here is pretty much the same as with ETFs; albeit less strict, but potentially larger in impact as the world of mutual funds and other managed equity funds are still much bigger than ETF land. Benchmarks are the most common way to evaluate a fund’s performance, and it sets a goal post for the individual mandate. And in the equity world, the S&P 500 is the biggest benchmark by far.
For a concentrated, say, 30-company fund, not having Uber doesn’t represent much risk of missed alpha, but for a more diversified mutual fund, choosing not to include Uber effectively represents a synthetic short position. If you like the company, then you’d be ‘overweight’ it in your fund (hold more than 0.3% of it). Negative on the company? You might hold less than 0.3%. Can’t decide or haven’t done the work yet? Then it’s better to be market weight until you’ve figured this out so as not to represent a drag on your portfolio.
Moreover, because your mutual fund only gets judged against the S&P 500, going ‘off-benchmark’ to buy a company like Uber before its addition presents increased risk. Even if you liked the company before it got added to the S&P 500, you might still want to avoid it, because if an ‘on benchmark’ company in your fund blows-up, you’d have some explaining to do to your investors/CIO/financial advisors. But if you get blown-up by a company ‘off benchmark’, that conversation is even worse. Adding Uber to the S&P 500 opens it up to potentially a massive amount of new investor capital, now that it’s been sanctified.
To prove I’m not just making this up to fill a slow news day, above you can see that for the last 14 companies added to the S&P 500 the stock move due to the announcement has been pretty material and averages 3.1%.
Just like highschool gym class, it’s nice to be included.
AMAZON CUTS PAYPAL’S VENMO FROM PLATFORM - Amazon has announced that it will stop accepting Venmo as a payment method starting January 10, although Venmo debit and credit cards will still be accepted. This decision, reversing a move from last October to add Venmo, comes amid no clear explanation from Amazon, despite Venmo affirming their ongoing relationship with the retail giant. Venmo’s owner, PayPal, saw their shares get hurt as a result. (CNBC has more on this).
U.S. MORTGAGE RATE - Mortgage rates have decreased for the sixth consecutive week to 7.03%, the lowest since mid-August, spurring a modest revival in the refinance market, although further reductions are needed to consistently boost demand, according to Freddie Mac's chief economist. (Yahoo has more details)
Joke Of The Day
Four professionals are interviewing for a math-intensive position in a company. The shortlist of applicants includes a mathematician, a physicist, an engineer, and an accountant. To begin each interview, the representative from HR poses a simple math problem to warm up the candidates: “What is 45+18?” The mathematician immediately responds “63”. The physicist responds “63, plus or minus 5%”. The engineer thinks for a moment and responds “63, but for safety, let’s call it 70”. The accountant shuts the door, checks over his shoulder, leans in close to the desk, and whispers “How much do you want it to be?”
Hot Headlines
Bloomberg | Bond traders to face a reality check with Friday’s Jobs Report.
Wired | Spotify Is Screwed. Spotify is the world’s biggest music streamer but rarely turns a profit and just cut 17 percent of its workforce.
NY Post | House Republicans unveil resolution to authorize Biden impeachment inquiry. Good luck with that.
Reuters | More than 10 million people have signed up for X in December, CEO says. Who the hell didn’t already have Twitter?
WSJ | The OpenAI Board Member who clashed with Sam Altman shares her side. “He kept talking about building something called ‘Skynet’. Super weird.” Ok, I made that up.
Trivia
This week’s trivia is on famous investors.
Who wrote the famous investing book "The Intelligent Investor"?
A) Benjamin Graham
B) Warren Buffett
C) George Soros
D) Peter Lynch
Which investor is well-known for the "All Weather" investment portfolio
A) Warren Buffett
B) Carl Icahn
C) Ray Dalio
D) John Paulson
What was the original business of Berkshire Hathaway before Warren Buffett transformed it into a holding company?
A) Insurance
B) Textile Manufacturing
C) Retail
D) Food and Beverage
(answers at bottom)
Market Movers
Winners!
Verint Systems (VRNT) [+19.0%]: Beat Q3 revenue and EPS. Analysts look forward to an upcoming analyst meeting as a potential catalyst, highlighting the company's AI differentiation. [AI ALERT]
JetBlue Airways (JBLU) [+15.2%]: Updated guidance with raised Q4 and FY EPS and revenue, driven by robust travel demand and strong operational performance.
Cerevel Therapeutics (CERE) [+11.4%]: Set to be acquired by AbbVie for approximately $8.7bn.
Advanced Micro Devices (AMD) [+9.9%]: Unveiled the MI300X GPU, boasting 2.4x more memory and 1.6x more bandwidth than Nvidia's offerings; raised medium-term growth expectations for the AI accelerator market. [AI ALERT]
Alphabet (GOOGL) [+5.3%]: Positive market response to the announcement of the Gemini AI model, claimed to outperform OpenAI's GPT-4 in tests, with potential for enhanced monetization across Google's platforms. [AI ALERT]
Losers!
-12.1% NAPA (The Duckhorn Portfolio): Fiscal Q1 results a bit weaker and company slightly lowered high end of sales and EBITDA guidance; flagged dampened consumer sentiment and premium wine trends; also some overhang from recent M&A; downgraded at BofA.
-10.7% AI (C3.ai, Inc.): Beat Q2 EPS, missed on Revenue. Analysts noted guidance reflects higher R&D and sales costs than expected, adding additional challenge to cash flow positive goal by FY25. lol even their ticker is AI. [AI ALERT]
Market Update
Trivia Answers
A) Benjamin Graham wrote The Intelligent Investor - a sacred tomb of the financial world.
C) Ray Dalio ran Bridgewater’s All Weather Fund, although after reading the new book on him, The Fund by Rob Copeland, I think he’s kinda a weiner. Great book though.
B) Textile Manufacturing was the original business of Berkshire Hathaway.
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