Time For A Fresh Take

Equities start the day higher as we catch a little bounce from the “Sacking of Kings Landing” selloff. What an episode right? Had to be some of the best TV I’ve ever seen, just an emotional gut punch, and frankly a very appropriate lead in to a massacre in the market the very next day. So look, I needed a few days to let recent events sink in before I could give you a fresh update so here’s where I think we currently stand. It’s been proven that the statement “some kind of trade deal is going to be made because it’s in both sides best interest” is a really bad take. I’ve said it a few times here and in the media and it’s been shown to be demonstrably wrong. I also thought they’d kick the can on raising tariffs so I should probably be leaving international trade policy to my friend Dan Clifton at Strategas. That being said, I do love pontificating so here’s a fresh take: I think the only way China and the US come to some kind of deal is if the market forces them to, specifically thru some kind of negative credit/equity event. Oh and a 5% selloff isn’t said event, on average we see three 5% selloffs a year so that’s not what I’m talking about. We’d have to see some kind of flame out because absent that why would either side budge? If tariffs knock 20-25bps off US growth would that be enough to cave in on negotiations? I doubt it, and if the market just kinda grinds along all summer that wouldn’t be enough either (in fact it would likely embolden MORE tariffs). What I’m trying to say is that I’ve finally come to the realization that “trade war” headlines aren’t going away anytime soon, if ever, so stop randomly buying / selling based on tweets. Fool me once, shame on you, fool me…umm what is it now about 62 times we’ve heard “trade talks are going great!” …then shame on me.

Well, it turns out that the market stopped worrying about tariffs and a trade war all of 10 seconds into the session because we basically went straight up all day. People buying the dip? Sure. Was the market oversold? Maybe, the peak to trough decline yesterday was around 4.6% and downside volume swamped upside volume. Is Arya going to kill Dany? I don’t think so because that seems too obvious. If the stock market doesn’t experience that “event” you mentioned earlier will that embolden the administration to enact even MORE tariffs? Absolutely. What’s the right amount to pay a babysitter? Please weigh in here (I might blog on this topic, I’d love to know what people think in 2019.  Feel free to @ me). Up 1.3% by lunch as the first meaningful dip of the year put up a better defense than the Golden Company. I don’t know, I guess I was really surprised by how strong the market was today; nothing has changed in the past 24 hrs. Maybe a 5% selloff was the correct discount for the current level of trade tension? Maybe I should stop using so many question marks in this blog?

We saw a small selloff in the afternoon and a close at 2,834 up 0.8% (late selling is always curious to me). Anyway, my friend @LJKawa wrote a great article today about tariffs and the market. Here’s the money quote: “The danger, though, is that American equities are caught in a so-called Minsky Paradox. Srinivas Thiruvadanthai, research director at the Jerome Levy Forecasting Center in Mt. Kisco, New York, mused about that earlier this year. The logic dictates that unless the market sells off, the president would feel confident in pushing forward with his trade offensive -- in turn raising the risk of an even bigger slide”. Look, I don’t know what the right answer here is. I want the US to protect its IP, I want our trade partners to treat us fairly, heck I think we all do. But ratcheting this thing up, which will happen if the market shrugs its shoulders, could lead to all kinds of crazy outcomes. Or maybe, like the Cold War, this stays with us for an indefinite amount of time and we just get used to it?  

News Highlights:

I have two final links for you tonight because I love them both equally

First of all, if you are a painter, I think your job is safe from robots

and

Second, who doesn’t love a good fail video!!

 

Headline Driven Market

Equities start the day lower as we slip back into a headline driven market. It happens from time to time, usually revolving around some kind of scare (the European crisis, Ebola, Debt Ceilings), and it tends to dominate price action for an unspecified amount of time. The scare du jour is this escalation in Tariff / Trade War fears so if you’re pulling up the market and you see it +/- some crazy amount it’s likely the result of someone from China or the US saying something on Twitter. Let’s do a thought experiment shall we?   What would we WANT to see happen in the near term? I guess it would be one of two things: 1) A grand deal that the market didn’t expect thus providing us with a really nice catalyst to global growth or 2) Friday to arrive and the US administration to say something like “China made a great step towards us so we’re going to delay increasing tariffs while this plays out” (i.e. kick the can). What would we NOT want to happen? The nuclear option: a full blown escalation in tariffs from both sides accompanied by a cessation in negotiations thus threatening the nascent recovery in global economic data. Yesterday’s selloff was about giving a higher weight to that last outcome, the market just doesn’t want to see the nukes fly. My gut tells me they’ll kick the can because that’s what politicians always do. But that doesn’t mean the other two can’t happen (Goldman wants you to worry *shrug*). I have no crystal ball here (neither does anyone else), the fact that these outcomes are so hard to weight is why the market is on edge, jittery, acting like it drank 4 double espresso’s and a red bull. I said it on Monday: we have to expect volatility will be increased in the short term while these negotiations play out, something this major can’t be easy.

The market spent most of the day zigging and zagging on trade headlines so I won’t make too much of random noise because nothing really happened. Speaking of noise, I feel compelled to weigh in on the chatter around BYND. If you don’t know what that is it’s a recent IPO, Beyond Meat, that has a pretty juicy looking product on their website. Now look, I don’t know anything about this company financials or whether it’s cheap or expensive or has a bright future or not, what I want to address is the notion that something like BYND signals a “bubble” because of how much it’s gone up since it started trading. Everyone loves to bring up the late 90s when they tell people they are worried about a bubble, it’s almost always cited when a company that hasn’t turned a profit does well from the get go. Nevermind the fact that back then there were like 10+ IPOs a day where the company went up something stupid like 200%+ because they delivered candy to you for free or they had a boatload of “clicks” on their website. BYND is an ESG friendly publically traded “pure play” on a new trend in the food space: alternative protein. That’s it. You know how many of those types of companies exist in the public markets right now? Very few. My view, and I could be wrong, is that it’s just supply and demand for a new type of company/product. Look, I don’t care what it does now, a week from now, or 10 years from now, I have zero view on this companies prospects, I just don’t want people to constantly throw around the term “bubble” because of one data point they cherry picked. 

Allow me to end this somewhat loquacious blog with a thought from Ed Clissold of NDR, who I deeply respect as a US Market Strategist. He recently wrote a piece wondering if the market can handle some bad news. Here’s the money quote: “The quality of any pullback will determine if it is part of a topping process or a healthy reset before a push to new highs. The technical health of the market suggests the latter." Basically what he’s wants to see is if recent events manage to reduce excessive sentiment without doing too much technical damage to things like breadth and internals. If this uptrend is for real then it should be able to weather a batch of bad news, rely on its strong internals, and then continue higher. If not then maybe the ground it was built upon wasn’t that firm in the first place (something they and we watch for). I mean as of now the maximum drawdown in 2019 is only 2.48%, the lowest of any year in HISTORY, we really haven’t even tested this move off the lows yet!

News Highlights:

Way too long of a blog tonight so I’ll skip to the big finish. I have 3 links for your viewing pleasure

The first is my favorite but it’s long. Someone reimagined the fight between Vader and Obi Wan on the Death Star in Ep 4. 6 mins long but absolutely amazing, I was riveted

The second is for my soccer peeps in Europe, especially my boy GK in London. A chilling rendition of “You Will Never Walk Alone” after an unbelievable victory.

The final link is something I’m going to teach my kids to do at their next swim meet.

Oh The Humanity

Equities start the day lower on the 82nd anniversary of the Hindenburg disaster. Appropriate right? A random trade war tweet by our President on Sunday night and I’m walking into work with futures down 1.5% saying “oh the humanity”. Remember last week when I said it was time to “nitpick” the market? Remember how we were soaring on good economic news, better than expected earnings, and a dovish Fed yet internals were a bit questionable and optimism was starting to reach excessive levels? Yea…we were due for some kind of “shock,” it just so happened to come from a tweet. By the way, don’t tell me you aren’t on Twitter. If you are in the Financial Services Industry and you ARENT on Twitter you basically stand the chance of missing critical market moving events in real time. You don’t have to tweet but you do have to listen to what is basically the tape now. JOIN TWITTER (then follow @bullandbaird). Anyway, the lazy take is that ramping up a trade war is bad for the market. I’ll admit that volatility and headline risk will increase in the short term and if this morphs into a full blown Trade War that’s just outright “maybe do some recon before flying your dragons into enemy territory” levels of bad. But maybe, just maybe, the right take here is that this will 1) keep the Fed on the sidelines 2) reduces optimism in the market 3) maintain a Wall of Worry and 4) test the notion that there are people on the sidelines ready to buy dips. My man Clifton @strategasrp says “it’s always darkest before the dawn” and he’s right. We’re in the endgame of negotiations now, maybe this forces China and the US to make a broad sweeping deal that surprises to the UPSIDE. Hey, you know what surprised to the upside? That episode of GoT last night, which was infinitely better than the Battle of Winterfell.

Most of the initial reaction today was positive….can you believe that? The low was made about 2 minutes into the session and by lunch we were down less than 1%. Why? Well, the notion of a “trade war” has been with us for over a year now, it’s not like the battle has just begun. “But Mike, if that’s the case then why were futures down 2% on Sunday night?” A) because people love to overreact and B) the market doesn’t react well to surprises. Like me, I don’t react well to surprises (can you name the movie?). It seems like we’re giving the benefit of the doubt to the process, that a positive outcome is more likely than a full blown trade war and that we just gotta get thru the endgame. Remember when Cap stood alone and all seemed lost? This process is probably harder than defeating Thanos but if it’s done the right way we could be looking at the next great catalyst. Frankly we’re lucky this news came out, there was nothing on the radar today. Earnings are basically over, the Fed is done for awhile, and there was no economic data. I mean I could’ve filled a blog with questions like “why not just fire those giant arrows at Dany and the 14 people standing there thus ending the war” or “why do I not own this” but instead we got something market related to talk about!!

We ALMOST got to green (the Rusk2 managed to) but in the end closed down 0.5% on a day that turned out far better than people thought it would be. Here’s the sitch, broken down as simple as I can make it: With respect to the market there’s nothing more powerful than an easy Fed. If the Fed is dovish that fact alone can outweigh many things including trade war rhetoric. We have an economy that is humming along, a stock market that is humming along (not without its faults though), and the Fed on our side. Those three things are likely worth more than the uncertainty around China / US relations. Speaking of that, let’s give the last sentence to my guy Voltaire: “Uncertainty is an uncomfortable position. But certainty is an absurd one.”

News Highlights:

So I have two hard and fast rules. #1: I always tip street musicians. If someone is going to take the time to create music in public I plan on rewarding them (especially violin) 

    #2: I love the Irish, especially when they do card tricks while drunk. Love the Irish.

It's May Already?

Equities start the day higher as May begins! Can you believe it’s May already, how is that even possible? The phrase “the days go slow but the years fly by” couldn’t be more true (especially if you have kids). April though…WOW.  Was that the best April of all time? Maybe, maybe not, but for pop culture it’s definitely in the running. Avengers Endgame plus the Battle of Winterfell? Forget about it. How much longer do I have to wait before I can spoil people on those two things? I’ll give you until Monday of next week before I fill this blog with references to how awesome fat Thor was and how boring Bran is. Ok, here is what we got for index returns in April: SPX +2.8%, Nasd Comp +3.4%, Rus2k +2.3%. The YTD returns are even meatier: SPX +17.5%, Nasd Comp +22%, Rus2k +18%. Stock Market Returns ASSEMBLE. Those are the best starts to the year in decades BUT (there’s always a but isn’t there) we need to start nitpicking. When our Thor takes the hammer from the past does that mean the Thor in that timeline…arrghh…man I wanna talk these movies so badly with you…focus Antonelli. While the market is currently trading at all-time highs there are things that are bothersome right now. My partner Willie points out that the # of stocks making new highs, while the market is making new highs, isn’t expanding like it did in previous breakouts. We’ve also got our eyes on optimism which is starting to surge. Not only that, we’re heading into one of the weakest 6 month stretches for the market (h/t RyanDetrick) so the conditions necessary for a correction are starting to add up. Look, when a market becomes overloved and the foundation it’s built upon isn’t all that strong a casual swipe from a Valryian blade can bring it down (I may need to buy this for my office). Now I’m not saying a correction HAS to happen but we need to be vigilant after such a strong move.

Lots of cross currents today between a Fed meeting and ongoing earnings. Apple said they experienced their worst ever drop in iPhone sales so the stock must’ve gotten killed right? Nope, +6%  because people are starting to focus on their services (20% of revs, 33% of gross profit). How about this tidbit? AAPL trades at a lower PE than Proctor and Gamble (18 vs 25). Hey…here’s a question for you…do we need FAANG to rally for the market to rally? I argue no because FAANG is the product of a different era. Does anyone talk about PIIGS, The Nifty 50 or The 4 Horsemen anymore? Of course not. These companies all face their own idiosyncratic risks now, they aren’t bundled together in one giant acronym anymore. Which is FINE, we still want Tech to do well, we still want these companies to do well, all I’m saying is we don’t need the 5 names in FAANG to lead us anymore. In fact my good friends at Strategas have been monitoring the move in Financials which we’d LOVE to see lead.

The Fed announcement was basically inline with what the market expected but they did worry about inflation being a bit below their target. We churned up and down around the event but ultimately the Fed is being patient with rates and only time will tell if that’s the right stance. Nitpicking…you’re gonna see a lot of it over the next few months. We started the year 4 for 4 (every month has been positive) which has happened 15 times since 1950. Let’s end with this chart (also from my crew at Strategas) showing what happened in those years. Notice that every single one of them had some kind of drawdown averaging about -8%. We need to nitpick the market for signs of vulnerability; nothing goes up in a straight line other than my waist size.

News Highlights:

We’ll end tonight on some everyday trick shots from Dude Perfect. Next time I’m in COST with my wife I’m gonna try that cheese puff one not only because it looks cool but I’m dying for a giant container of cheese puffs.

https://youtu.be/qlzVPauUgw8

Have a good night

Closing In On The Highs

Equities start the day higher as a mouseload of news hits the tape! I don’t normally do a Friday recap because 1) I feel like no one wants to read market content on Fridays and 2) after people drink one of the 4 Ms they just delete my email before opening it. BUT I’m inspired to write because one of my favorite companies, Disney, announced their streaming service last night! For $6.99 a month, less than the cost of a light beer in NYC, you are gonna get every Disney movie, plus the Simpsons, plus original content, plus much much more. Wait…Mr BullandBaird..coveter of all things fleece….did you say $6.99 a month because Netflix charges me $9 a month for one screen? Yep…begun the streaming price wars have (Disney will lose a projected $3.9 billion on streaming this year, and nearly $5 billion next year. A huge investment). I mean if you have kids is there any way on God’s green Earth you aren’t waiving this thing in? Please. It might be the final nail in the coffin for cable bundles, why would anyone still be using those? JPM reported last night and beat expectations. I’ve said it before but we need Financials to pull their weight here and the house of Dimon beating is a good start.  Finally, Chevron acquired Anadarko Petroleum boosting sentiment in the Energy space. This is a $33B deal and it’s refreshing to see because it makes me think animal spirits are still alive and well. Media, Financials, Energy, a slew of positive market catalysts this morning put futures just shy of their all-time highs. Let’s see if they close there.

After the open the S&P500 Total Return Index hit a new all-time high. That might be a hipster index (most people just default to the plain vanilla S&P500) but it’s real and it did break its old high. Disney soared 11.5%, JPM gained 4.6%, and APC rose 32% so all those events I mentioned earlier helped push the tape higher. Now look, I want you to remember something as we approach the old highs. All of this doesn’t mean things can’t go wrong, that we’re “in the clear” and the World is peachy. Things can always go wrong and when they do they shock everyone in the process. In fact, if we wanted to be honest with ourselves, long term returns in the stock market aren’t great when unemployment is this low. But news has been getting better at the margin in China and in Europe, the US economy continues to chug along, the Fed is friendly, and if earnings aren’t as bad as people think then we continue to climb the proverbial wall of worry. We want that wall…you NEED ME ON THAT WALL. By lunch were drifting around, but of the highs, 2,904 up 0.5%

***Im interrupting this recap for the NEW STAR WARS TRAILER. HYPE!!**** (my theory on the title here)

The rest of the day didn’t bring much new other than that trailer so let’s wrap up because no one wants to read 800 words on a Friday. We closed at 2,907, less than 1% away from a new record high. Earnings season is just getting started, we have a long way to go, so I won’t make any broad statements with only 29 S&P companies having reported (rare for me). I say this all the time but in the short term markets trade on better or worse and things have indeed been getting better. If that continues then maybe we rip thru these old highs and never look back. But optimism is rising, if you start to see fund flows turn sharply positive that could also be troubling. We don’t want to see euphoria break out that’s the worst case scenario right now. 

Hey…I’d be remiss if I didn’t mention Game of Thrones this Sunday! Can’t wait!! One of our unbelievably talented Client Specialists Kristin S shot me this link (shout out to your boy Tom too) that you NEED to catch up on. Hey Kristin and Tom…send me more links...you rock. 

News Highlights:

I only have one video tonight because it needs to stand alone. I hate when people get caught up in the nonsense that “things are hard right now, everything seems so bad, I’m worried about where things are going”. Look, there’s always a reason to worry, ALWAYS, but I think optimism needs to be your default setting. Humanity is an incredible thing; we’ve come so far in such a short period of time. Look at what we are doing right now. Look at this video and the one from last year. You live in extraordinary times and I want you to cherish it. The future is incredibly bright and I’m so happy to be alive at this moment in history talking with you. I can’t wait to see what happens next!