🔬Stocks Aren't Cheap, the Fed is Chill, Homebuilders Are Flying, and Much More

"The only time I really ever lost money was when I broke my own rules"
- Jesse Livermore

“Money doesn’t change you. It reveals who you are when you no longer have to be nice”
- Tim Ferriss

• The big US markets were up for a fifth straight day (S&P 500 +1.37%, Nasdaq +1.38%), with their biggest one-day gains since November 14th.

• The Dow Jones Industrial Average reached a new all-time high, with the S&P 500 closing in on its record set in 2021 (~1.2% away). Nasdaq still has a ways to go from its 2021 peak at around 10% left to go.

• All 11 sectors finished in the green, led by interest rate sensitive Utilities (+3.7%) after another dovish Fed meeting (more below). Info Tech (+0.9%) and Communication Services (+0.7%) were the weak links today.

• The big news of the day was the outcome of the US Federal Reserve’s December meeting. J-Pow and Co. kept their target interest rate unchanged (as expected) and indicated a glide path equating to 3 interest rate cuts in 2024.

• Pfizer was the dog of the day (-6.7%) after it announced 2024 Revenue and EPS guidance well below the Street’s consensus.

Street Stories

VALUATION UPDATE - After the momentous November rally, the S&P 500 and Nasdaq are up 22.6% and 40.8%, respectively. But are things getting into scary, ‘overbought’ territory?

As you can see above, it’s nothing too egregious but - excluding the COVID weirdness - things are definitely in elevated territory compared to the historical average. The next-twelve-months forward P/E for the S&P is only 10.1% above this level, so definitely not in ‘bubble’ territory, but, at a 19.2% premium, the Nasdaq is looking a bit dear.

To put the S&P 500 into better perspective, things peaked out above 25x during the Tech Bubble but we are well clear of the 2007 highs before the Great Financial Crisis. So, things definitely aren’t cheap…nor does it seem like it’s time to head to the bomb shelter.

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THE FED MEETING - The Federal Reserve kept its key interest rate steady (as expected) at 5.25%-5.5% and plans around three rate cuts starting in 2024, with the market now expecting more aggressive cuts than the Fed's indication. Inflation has eased from its 40-year high without significantly increasing unemployment, leading to an optimistic outlook with the Fed's preferred inflation gauge nearing its 2% target. Despite the economic slowdown, GDP is expected to grow, and the Fed remains open to rate hikes if inflation rises, especially as the 2024 presidential election approaches. [CNBC has more on the Fed]

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SPACEX VALUATION HITS $180 BILLION - SpaceX's valuation has soared to a stratospheric $180 billion, thanks to an ongoing secondary share sale, making even its Falcon rockets look modest in comparison. The company, now a "centicorn," outpaces top U.S. defense and telecom companies in market value, suggesting that launching satellites might just be more lucrative than building fighter jets or running phone networks.

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HOUSING MARKET - The U.S. housing market is experiencing a resurgence in 2023, with mortgage rates and inflation receding and the SPDR S&P Homebuilders ETF (XHB) gaining ~50% this year. Large public homebuilders are expected to continue their market dominance, leveraging their scale to control millions of lots and expand in urban and smaller cities, despite facing high labor and land costs. Creative solutions like mortgage rate buydowns* are being used to attract buyers, particularly first-timers, though builders remain cautious about future returns amid Federal Reserve Chair Jerome Powell's "higher for longer" interest rate outlook.

‘Mortgage Rate Buydowns’: I hadn’t heard much of these before 2023 so thought I’d try to explain their importance. Large homebuilders, keen to maintain selling activity and move inventory, offer new buyers options for ‘buydowns’ where they effectively subsidize part of the interest rate associated with a mortgage. These can take many different forms but typically involves the homebuilder paying into an escrow account which is calculated to offset a fixed percentage of the interest rate. For example, Lennar (a large home builder) has been offering its customers fixed mortgage rates at 4.75% in Colorado - well below the industry norm in the ~7% range.

Joke Of The Day

You know you’ve gone to the wrong stockbroker when you ask him to buy 10,000 shares in IBM and he asks you how to spell it.

Hot Headlines

CNBC | OpenAI and Axel Springer strike deal to offer news in ChatGPT.

AP | UN General Assembly votes overwhelmingly to demand a humanitarian cease-fire in Gaza. The vote in the 193-member world body was 153 in favor, 10 against (including the US) and 23 abstentions.

Bloomberg | Apple set to be hit by EU Antitrust order in app store fight with Spotify. If you read yesterday’s note, you’d know I’m expecting a big shake-up for the tollkeepers running the App stores of the world.

Bloomberg | Venezuela nearly doubles budget as Maduro prepares for election (and possible invasion of Guyana). Thought they, you know, ‘didn’t have money’?

CNBC | Etsy stock falls after company lays off 11% of its staff, citing ‘very challenging’ environment.

Trivia

This week’s trivia is on financial crises and bubbles.

1. The 'Railway Mania' bubble occurred in which country during the 1840s?
   A) United States
   B) United Kingdom
   C) Germany
   D) France

2. In the movie "The Big Short," characters bet against the housing market using what financial instrument?
   A) Bond Shorts
   B) Stocks
   C) Credit Default Swaps
   D) Index Options

3. The 'Panic of 1907' was primarily alleviated by the actions of which influential banker?
   A) Andrew Mellon
   B) J.P. Morgan
   C) John D. Rockefeller
   D) George Soros

(answers at bottom)

Market Movers

Winners!

• Vertex Pharmaceuticals (VRTX) [+13.2%]: Its non-opioid pain drug VX-548 showed success in a mid-stage trial, reducing nerve pain. Further late-stage studies for acute pain are expected in Q1.

• Mohawk Industries (MHK) [+7.1%]: Upgraded by Barclays to equal weight from underweight, citing a more favorable outlook for the building products sector and potential for these stocks to outperform homebuilders.

• United States Steel (X) [+6.1%]: Board meeting today to review its five take-over bids. CNBC reports Cleveland-Cliffs's bid exceeds $40 in cash and stock, while ArcelorMittal is allegedly prepared to offer up to $45 a share in cash.

Losers!

• Pfizer (PFE) [-6.7%]: Reported FY24 revenue and adjusted EPS guidance below expectations. The forecast is $2.05-2.25 for adjusted EPS, compared to a consensus of $3.16, and revenue of $58.5B to $61.5B versus $63.17B expected.

• Southwest Airlines (LUV) [-3.8%]: Updated Q4 unit revenues to the higher end of its range, citing stronger-than-expected bookings. However, the forecast for jet fuel prices increased, and the company reduced its long-term capacity growth plans.

• Etsy (ETSY) [-2.2%]: Announced a restructuring plan including an 11% workforce reduction, with expected charges of $25-30M, and a negative growth outlook.

Market Update

Trivia Answers

1. B) The 1840s ‘Railway Mania’ happened in the United Kingdom.

2. C) Credit default swaps were the main instrument used to short the U.S. housing market.

3. B) J.P. Morgan (the bloke) helped the US out of the ‘Panic of 1907’ by pledging his own money and forming a consortium of other bankers to shore up the banking system.

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