May Bull and Baird Blog

May 28, 2013

Equities start the day higher as our great Memorial Day holiday comes to an end. Before I continue, I wanted to take a brief moment to thank anyone and everyone who serves in a uniform and defends those who cannot defend themselves for they are truly the superheroes of our world. "We sleep safely at night because rough men stand ready to visit violence on those who would harm us" - Grenier. So what have I missed? I’ve been gone about a week and noticed the market got shaky all of a sudden, did we discover gravity again? Maybe, maybe not, but there’s another word you need to make yourself familiar with if you have money on the pass line. Taper. Whoa Antonelli…shhhhh…don’t say that too loud or you might spook the market Gods. We’re going to put that word alongside Voldemort as "a word that shall not be spoken" because it comprises the entire Bear case. From what I can tell it goes like this: when the Fed removes its foot from the bond buying gas pedal we are going to have some kind of Battle of Hogwarts where everyone holding stocks gets splinched (I mean you REALLY have to be a Harry Potter fan to be following me here right?) The problem with this is that neither you, nor I, nor Bill Gross, nor anyone in the world knows when its coming, and to try and time it is not only folly, it’s as ridiculous as most of the stuff in these Potter books. So when you see goofy price action based on some talking head saying the Fed might stop doing what it’s doing, try and take it with a grain of salt. Play the game in front of you, adapt to the CURRENT situation, because otherwise you’ll be chasing a golden snitch around that will only lead you in the wrong direction (you know what, I’m not even a huge fan of these books, but it seemed to work right?).

After the open we got a #rip as every economic data point beat (they all beat on Friday too). 10yr yields touched the highest level of the year as Home prices soared and consumers became more confident. The "Present Situation" index hit its highest level since mid- 2008 as mom and pop noticed their 401ks growing and their neighbors’ homes selling in 30 minutes with 8 offers. Remember that a lot of what you see in the stock market is sentiment driven, so as you look around ask yourself "do I feel better about my house/retirement/situation than I did a year ago?" I bet the vast majority of you would answer "yes" which is why we continue to grind higher. We touched 1,674 an hour into the day (up 1.5%) but unfortunately that was the high. We spent the rest of the morning slowly grinding lower as profits were took. I’ll tell you what, if we continue to see price action like this I will almost certainly turn on this market. When you see gawdy intraday reversals off good news then you need to raise an eyebrow a la Mr. Spock (I’m in full geek mode today). By lunch we sat on 1,664 and it felt like gas was slowly leaking out of a balloon.

The back half saw the leak get plugged and we bounced off the intraday low to close at 1,660, up a measly 63bps (felt like we shoulda killed it today). Winners were STT, TIF, ETFC, THC, and TRIP. Losers EXC, NFLX, FE, NRG, and CRM. Decent day for equities but it feels like the real story is probably the move in bonds because they got smoked. Great rotation? Not yet, maybe never, but certainly worth watching. Are they starting to price better growth ahead? Inquiring minds want to know.

Let’s end this puppy with one final thought. Bears would have you believe that the end of Fed stimulus is the end of the rally. They might be right, it will certainly mix things up a bit, but the very same people also tell you that Fed bond buying is bad to begin with! Wait…wait…so let me get this straight: Fed pumping is wrong and is artificially inflating stocks so that’s bad. But when they taper that’s also bad. Hmmm....and I’m supposed to be swayed by this? Let’s deal with this madness when it comes, not every time someone drops the T word in an article. Final Score: Dow +69bps, S&P500 +63bps, Nasdaq +70bps, Rus2k +133bps.

News Highlights:

  • Bespoke takes a look at pullbacks from the high and notes..: While the lack of a meaningful pullback so far this year seems historic, in 1995 the S&P 500 never saw a pullback of more than 2.72% from an intra-year high. In 1995, a lot of traders were also waiting for a correction or a pullback to get in, but in that year, even for a pullback of under 3%, you had to wait all the way until 12/20 to get it!
  • Great article here about how happiness changes with age. I couldn’t agree more with this: This way of spending my Saturday nights makes me happy. If you went back and told my cooler 20-year-old self about the typical evening that awaits the future her, though, she would be pretty devastated that her life turns out to be so ... boring. That a Saturday night spent reading a book -- not even a new book -- qualifies as a great time.
  • So yea…. the military does have some crackpots in it too….
  • If you are in Gen X (born between ‘65 and ‘81) you might not wanna click this link. "In a society where success is often equated with being financially better off than the generation prior, young Americans today are way behind the pack."
  • If you just graduated college, you might not wanna click this link. "Consider this: You have just paid about three times as much for your degree as did someone graduating 30 years ago. That’s in constant dollars — in other words, after accounting for inflation. There is no evidence that you have received a degree three times as good. Some would wonder if you have received a degree even one times as good."
  • If you don’t wanna be extremely depressed, you might not wanna click this link
  • Great factoid about buybacks: Credit Suisse reports that through last week there have been $320 billion in announced share repurchases in 2013. For reference announced repurchases for the entire year of 2012 were $477 billion and 2012 was a strong year for repurchases. At the current pace there will be well over $800 billion in announced share repurchases in 2013. If indeed corporations repurchase that much stock it would amount to over $3 billion every trading day. I don’t believe that corporations will be able to keep up the current pace but even at a somewhat more moderate pace these numbers are astounding.
  • This kind of stuff is amazing to me: Brokers say there are now at least a half dozen homes and estates in the Hamptons that are renting for around $1 million—just for the summer. That works out to $9,803 per day, or $408 an hour. And the $1 million lease doesn't include utility bills or other charges, which can run in the tens of thousands. "It's unprecedented," said H. Dolly Lenz, a Manhattan broker who also works with buyers and renters in the Hamptons. "The demand is not just strong, it's unbelievable."
  • Bear fact of the day: The WSJ reported that investors ramped up their borrowing against brokerage accounts in April, taking margin debt to its highest-level ever. The NYSE said investors borrowed $384.4B against their investments in April, a 1.3% m/m increase and a 29% y/y rise. The figure exceeds the record of $381.4B in margin debt from June 2007.

Have a good night.