July Bull and Baird Blog

July 31, 2013

Equities start the day higher as the great Econ-a-palooza descends upon us. We had so much data today you’d think we hired one of those expensive consultants CEOs can’t seem to avoid. In the morning we got 2 major events to go along with our coffee. First we saw the ADP jobs data, which beat, coming in 200k vs 180k. I think it’s safe to say that we are in steady job growth mode because this number has hovered around 200k for the better part of 3 years now. After ADP we got a first look at 2nd Quarter GDP which came in 1.7% vs expectations of 1.0%. BOOM. Rates instantly jumped higher as more and more people realize growth is accelerating. But while all this macro mumbo jumbo provided a healthy morning snack let’s move to the bacon and cronuts. Want to know what’s REALLY goosing this market? Take a look at this chart and then come back and read this quote: “AMG reports 29 straight weeks of inflow to equity mutual funds totaling $80bn and if you add corporate repurchase that's $2bn of demand per day.” Not bad right? Just an endless bid to stocks by both companies and investors. Actually, let’s put this is an analogy we can all understand (because that’s kinda my deal): Economic data is the yellow cake of a Twinkie. It might be a bit spongey but it’s solid enough to hold the pasty together. Fund flows / buybacks are the creamy filling. They lie under the surface, ready to provide a reward to anyone brave enough to buy the market. When you put both the cake and the filling together it’s an All American treat the whole world can enjoy. Ok, let’s see what happened during the actual session.

After the open, we spent the first half of the day waiting for the second half of the day. Sounds exciting right? The FOMC decision came after lunch so we wandered around waiting for the big show. An early morning rally pushed us ever closer to 1,700 but a lack of follow thru settled us on 1,689 around lunch (slightly higher). Since morning price action was spotty at best let’s take a look at another one of these “I hope you have a good trader working for you” situations. Around noon ET it was reported that the Fed’s debit card swipe fee limits were rejected by a US judge and that headline alone hammered Visa and Mastercard. But here’s the problem, our markets are so dominated by algos and machines that the knee jerk reactions are almost universally bad. Remember when that twitter headline hit that the White House had been attacked and it knocked 1% off the SPX? Yea, stupid. Look at this intraday chart of MA and tell me you want machines running your risk. MA was near $620 today on stellar earnings then a headline hits and Skynet drives the stock mercilessly to $570. Time and again I sit here and shake my head at how ridiculous our market has become. Too many machines reading headlines, make sure you have a good execution partner (I know of one who loves the Chicago Bears and can occasionally be witty, call me if you want his number).

At 2pm ET we got the Fed decision in which they announced no new change to policy, but did flag low inflation as a risk. Recall that tapering bond purchases is now CONSENSUS for the Sep meeting, if they don’t, look out above. We tried one last time for 1,700 but came up short settling the day right where we started, 1,686. That being said, the pain trade is still higher, I’d bet a pint of Phish Food (the best Ben and Jerry flavor by FAR) that we see a new handle on the S&P this week. Think about it: the market has basically traded sideways since Mid-July. Rarely, if ever, does the tape give you this long to get out at the high. My gut tells me that we haven’t seen the top and that flows / macro data will keep us going in the right direction. What a weird day though. All that economic data, a bunch of Fed speak, the last day of the month, and we closed flat on the session. Just ridiculous. I’m stupefied over that. Final Score: Dow -13bps, S&P500 -1bps, Nasdaq +16bps, Rus2k +17bps.

News Highlights:

·Late day story worth watching: CIT — the largest commercial lender in the US apparel industry — has abruptly stopped supporting deliveries from smaller manufacturers to Penney stores, The Post has learned. JCP fell sharply on the news.
·Other movers today: SYMC +9.5%, GRMN +7%, CMCSA +5.5%, PSX +5%, V -7%, MOS -6%, ADT -4.5%, ADSK -3%, FE -3%.
·Everything important you need to know about GDP is right here, including this magnificent chart on the contribution of Residential Investment. Leading indicator people…
·Latest look at Top and Bottom line beat rates from Bespoke: More than 1,100 companies have released earnings at this point in the second quarter reporting period, and as shown below, 65.1% of these companies have beaten earnings per share estimates. We are now more than halfway through the season, so the current beat rate will become more and more sticky as the reporting period winds down. If 65.1% holds, it will be the highest beat rate in 10 quarters going back to Q4 2010.
·This might be the greatest feat since we landed a man on the Moon.
·I agree with JB here, you really REALLY have to start looking at Europe. “In addition, you'd have to leave earth to find a more hated asset class. Everyone's underweight Europe - they think it's the "conservative" thing to do while they chase the Russell 2000 at 20 times earnings. Meanwhile it's the largest economy on earth - 760 million people in 48 countries producing $16 trillion in GDP. Doesn't matter, no one wants it at any price. And this is the key - because sentiment explains a lot of the move we've had in the S&P 500. Multiple expansion is a symptom of improving emotional attitudes and perceptions. It's been a main ingredient for our domestic rally in recent years. By this spring, sentiment around European stocks had turned from pitch black to an apathetic shade of gray. The whole geography left for dead.”
·Speaking of consensus, JB also did a nice job of summing up current Wall St thinking. As always, doing the opposite of this is usually a winning strategy: 1) Overweight US stocks and / or US-focused stocks (companies with high domestic revenues, profits).Tailwinds: Shale Gas Revolution, continuing strength in housing, rebounding consumer sentiment. 2) Underweight international equities / EM equities. Headwinds: stronger dollar, China slowing growth. 3) Underweight international bonds, REITs, EM debt. Headwinds: less accommodation from US central bank, rates on lower-risk yield plays (like Treasurys) rising 4)Sectors: Overweight Tech, Financials Industrials. Underweight Utilities, Consumer Staples, Basic Materials 5) High oil prices are transitory, "geopolitically driven", "the wild card", a possible "headwind for the consumer". 6) September Taper expected, $15 billion taken off current $85 billion monthly asset purchases. Fed reiterates no change in interest rates anytime soon, as a "peace offering" to keep the bond market calm. Stocks falter at first, then rally into year end. 7)Larry Summers would be bad for the bond market. Janet Yellen would would be bullish for stock prices
·If you live in California this place is easy to get to and camp at. Why aren’t you there?
·I think I could write an entire recap on this link. “Blackstone, Deutsche Bank in talks to sell bond backed by Home rentals”. Wow, a new bond backed by home rental income? I mean what could go wrong there? It’s not like people who are renting are transient or anything. I’m sure that’s a rock solid stream of cash. Come to think of it, these bonds appear to be as well thought out as this!

 

We’ll end tonight with a golf shot I can’t believe I haven’t seen. How did I miss this? It’s incredible! (the commentator really screws the pooch too)

 

http://youtu.be/EFePqTMLt0g

 

Have a good night.