Rental Market

We all know that urban rental markets across the country have been very strong, and Cleveland is no exception.  I have been told that about 2,000 people are on waiting lists in downtown Cleveland alone.  As anyone who knows me is aware, my son and I like to tour old buildings, so last week we were thrilled to go on a tour of several new housing/office projects taking place in Cleveland.  It is amazing how much residential space has come online in the last few years and even more remarkable how much is planned and under construction.  RELATED:  Cleveland Apartments Rising at Insane Rate

On our tour, we had a behind-the-scenes look at four new projects, only one of which was finished.  The unit we toured in the finished project was being rented out as an AirBnb.  The second project was a relatively small apartment building; the owners were a group of basketball players from a different city who had invested in this building and were rehabbing it.  The third project was a repurposing of a large warehouse space into residential.  The owner told me that this project had never been viable until now and that this was the first project of this kind that they had done.  The last project was a huge 21-story former office building built in 1925.  Again the owner of this building told me that they usually do commercial work and that this was their first venture into residential.

My observation here is that all of these buildings are being done by new entrants into the market.  As excited as I am to see all this new construction and to see my city grow, I cannot help but wonder if we are starting to get into “bubble” territory.  It is often a sign of a bubble when there are new unexperienced speculators entering the market.  Apparently, Cleveland is still near 100% occupancy, but with multiple huge projects coming online in the next couple of years, it will be interesting to see if we can sustain this growth.   WATCH:  Rental Prices Showing Signs of Decline 

Interest Rates and Stocks are Positively Correlated

Contrary to the theory we all learned in ECON 101 about the relationship between interest rates and stock prices, (watch this video for a simple overview of the theory), the longer-term correlation between stocks and interest rates has been POSITIVE for almost 20 years.  Take a look at the chart I created below.  In this chart, the top shows the S&P 500 against 10-year U.S. Treasury rates, the bottom shows the trailing 20-quarter correlation between the two.  Interestingly, there was a clear change in 1998, when stocks and interest-rates began to move more in tandem.  I would love to hear theories from the readers as to why this change occurred.   Here are a few related thoughts and observations:

The Sharing Economy

I am fascinated by the new “Sharing Economy”.   The sharing economy is the new trend of people sharing their skills and resources with total strangers.  Technology has brought people together like never before and in ways never imagined.  The most recent sharing economy entity that has caught my attention is skillshare.com.  On skillshare.com, people sign up to learn random skills about a variety of subjects.  The key here is that the “teachers” are other users—total strangers—sitting at home behind their computers showing people the skills that they are passionate about.  Once they get more than 25 viewers, these “teachers” start to get paid.  Some examples the exploding Sharing Economy are (these all have links you can click):

I pondered whether I should hold back this blog, since it will make two in a week, but my guess is that readership will be low next week given the holiday.  I am hoping some of you will find the first bullet point interesting enough to quiz the family with during Thanksgiving break.

Fact Du Jour

One-third of the Fed district banks are run by Goldman Sachs alumni.  

Non-Farm Payrolls

Non-farm payrolls for October were much better than expected, coming in at 271,000 versus an expected 185,000.  This means that market was up today and that people were applauding the surprisingly strong economic data, right?  WRONG!  Conversely, the market digested it as a signal that the Fed will increase rates sooner rather than later, which is theoretically bad for most stocks.  Looking into the specifics, high-income stocks like REITS and Utilities were down the most, and Financials were relatively strong.  Further, the dollar moved strongly higher on this news, which is a negative for the materials and energy stocks.

Insider Buying in Energy

We all know that oil prices and the corresponding energy stocks have declined dramatically in the past year.  The recent drop in oil prices has been similar in magnitude to the other major drops of the last 32 years, which is as far back for which I can easily retrieve the data.  It is never a good idea to try to pick bottoms or “catch falling knives” as they say, but one might argue that the decline in oil prices is at least in the “seventh inning” from a magnitude standpoint.  See below:

You will undoubtedly hear on the news and read about how the Dow was down over 1,000 points at one point today, so I will not regurgitate that information.  What you might not read is that today was reminiscent of the 2011 “Flash Crash” for many stocks.  On the open, a number of well-known stocks dropped twenty percent or more.  Stocks like GE, Colgate-Palmolive, Boeing and Starbucks all experienced major, albeit brief, collapses.  Below is a one-year chart on Colgate-Palmolive.  Note today’s movement on the far right of the chart.  This stock went from mid-sixties to $50 and back to mid-sixties all by 9:36 am.  Now that this is the second “flash crash”, it appears to be a flaw in the market which has likely been exacerbated by automated and ETF trading.  It is hard to argue that the market is efficient and orderly when huge, usually non-volatile stocks can move up and down twenty percent in a five minute period.  Some illiquid ETFs were down as much as 40% this morning.  My guess is that like last time, many of these trades will be reversed by regulators. 

 S&P 500

Year To Date Returns

Now that we have entered the third quarter, I thought it might be interesting to look back at the performance of different market sectors.  Year to date, the S&P 500 is roughly flat and the typical (median) stock is down about one percent.  On a sector basis, as you can see below, the market has been quite bifurcated.  Investors who have been heavily invested in healthcare or consumer staples have likely outperformed while investors in industrials, utilities, energy and telecom have underperformed.  Considering the variance in sector returns, I would expect to see a fair amount of dispersion between active managers on a year-to-date basis.