June Bull and Baird Blog

June 5, 2013

Equities start the day lower but we’re still in that 1,625 to 1,650 range I told you about so don’t go panicky on me just yet. Let’s take a moment to do a thought experiment shall we? Why is it that I can never put the straw through a Capri Sun correctly? This might be the worst consumer invention that’s still around in the past 25 years. Wait, that’s a topic for another time, let’s talk about flight to safety instead. A colleague of mine, Garrett Holland (@GarrettHolland), who is a gentleman and a scholar, offered up this thought yesterday: “investors are struggling to find a risk off trade right now”. Is he onto something? Maybe, let’s pontificate for a bit shall we? If you were bearish stocks the past few years you could always short them, but you could also buy bonds and have a reasonable hedge. Over the past few weeks bonds have been selling off when stocks sell off. Why? Because of taper worries and bond bubbles worries and all that fun stuff. Yesterday was a prime example: the S&P acted like death yet 10yr yields went nowhere. In fact they were actually higher by days end. That jump out of bonds is also impacting safety plays like Utilities and Staples and all those dividend plays so you haven’t been able to go there either. Where am I supposed to turn if the bond trade is creaking and stocks act like they contracted the Novovirus? Cash? Right..and earn my 0.001% while inflation destroys it. Volatility? Maybe, but that trade is a tough one to manage. What is the safety trade right now? Anyway, markets are acting goofy all over the place so keep yourself nimble. Wait, maybe you put it all into 2000 Petrus instead? Sure would be an elegant investment.

After the open, the market basically looked like this. Morning price action was a straight line drop from 1,629 to 1,611 as investors remained somewhat leery of the market (justifiably so). Remember how I said we hadn’t broken my range yet? Well we did, about 30 mins into the day. Economic data was mixed: ADP jobs whiffed while ISM services was a slight beat. Check out this quote from the ISM survey, I thought it was the perfect summary for our economy: “The flat sequential sales -- which began in January 2012 -- are still continuing. At this point, we do not predict any lift in the foreseeable future. We do not see any negatives; it appears that business has reached its ’cruising altitude’ and is staying there (Wholesale Trade).” This is one of the main reasons I’m not outright bearish. We’re cruising along with a few tailwinds (housing / interest rates / improved personal balance sheets) but they aren’t enough to push us to ludicrous speed and make the Fed pull its ripcord. That’s why we need to stay somewhat constructive even thru pullbacks. The biggest losers today were FAST, CLF, CELG, GILD, and SEE. Winners were scarce, and only 9 stocks were up more than 1% led by JNPR, DG, MU, BBBY, and EW. By the end of lunch we sat on the lows, 1,609 down 132bps. Ugly. Very ugly. I think I heard Randolph and Mortimer blowing up in the background.

The back half of the day saw the release of the Fed Beige book where they called growth “moderate” (nothing groundbreaking here) which wasn’t enough to get us outta the ditch. We closed at 1,608, down 1.38%, on just an abysmal day for bulls. Sidelines, definitely the right place to be. Not forever, but certainly in the near term. How did bonds do? They rallied, but not by a huge amount. Let’s keep our eyes on that, it’s looking weird to me. So….does anyone think the Fed is going to taper anytime soon? If so…why? Economic data is flat to mediocre and stocks have pulled back 5% from the highs. The Fed meets Jun 18 and 19, if they come out and say “we’re keeping our pace for the foreseeable future” we are going to see a face ripping rally. Before that happens though we need to get all these weak bulls washed out, it’s not over yet (we need to dip below 1,600). Final Score: Dow -143bps, S&P500 -138bps, Nasdaq -123, Rus2k -141bps.

News Highlights:

Is this a good sign or a bad sign? Equity allocations nearly hit an six-year high last month, according to the May AAII Asset Allocation survey. Cash allocations, meanwhile, fell to a level not seen since 2010. It looks like individuals are starting to poke at the market.
This however, is definitely a good sign: WASHINGTON, D.C. -- Gallup's U.S. Job Creation Index increased to 22 in May, the highest score for any month since April 2008
What would be the bull case on AAPL if they invented this? 2000?
• Hey GMCR, my consulting fee for new products isn’t even all that high. I just want a couple dozen of those sweet hot chocolate k-cups in the mail!
Remember that Rwanda bond issue I poked fun at? Came out late April? I used it to illustrate the crazy reach for yield going on in the bond mkt (It was 8x oversubscribed and came out at a yield below where SPAIN was trading a year ago). Say, how is that bond doing? Oh….(I’m using this to point out that, at times, even bond investors can get over their skis)
You know what the funny thing about this video is? What this guy is doing is probably safer than driving while texting.
Why yes, I do love camping. There’s nothing like communing with nature alongside a Dark N Stormy (the best summer drink)
• If you are a young man in your 20s, please read this article. Take #4 and #8 to heart please.
• I always like to read how bigtime investors think about stocks so check these out if you have time. Lee Cooperman's hedge fund Omega Advisors' Overseas Partners returned 10.9% in the first quarter of 2013 and has seen annualized returns of 16.6% since inception. Here are a couple of excerpts from Omega's Q1 letter highlighting Cooperman's thesis on Covidien (COV) and Sirius XM Radio (SIRI).

We’ll end tonight with a crazy basketball trick shot. I’d love to know how long it took to do something like this. It has to be over 100 tries right?

http://youtu.be/u1ttHfOqM8E

Have a good night.