May Bull and Baird Blog

May 29, 2013

Equities start the day lower as the market goes schizo on us. I said that yesterday’s price action was enough to give me pause and walking in today and seeing futures lower makes me even pausier. Why? Because there was no news, nothing meaningful enough to cause a 75bps overnight drop. I guess the OECD did cut growth forecasts slightly but come on, are economic forecasts ever right? So what’s got me as nervous as people in line for this? Let’s start with the fact that 2 of the past 4 sessions have featured a big rally nearly wiped out by the bell, which leads me to believe that people are looking to sell rallies instead of buying them. Now that’s not life changing color but we need to be vigilant for tiny shifts in sentiment. So what else? Recent economic data has been pretty good but it appears to me that it’s being ignored. Maybe that’s fair play though because negative economic data is also ignored. Hmmm. Moving on we have the fact that lumber prices are acting funky but I haven’t been able to come up with reasonable conclusion about this yet. Should we care about lumber? Probably, one of the main drivers of bullishness is the rebound in housing so we don’t want to see demand for its main component fall. This one needs more thought (it might be a supply issue, or even seasonality?). Finally we have the fact that sentiment is frothy: AAII bulls (retail) are nearly 50% and II Bulls (newsletter writers) are 52%. Not ideal levels for higher stocks. I don’t know, I guess I’m having trouble explaining exactly why I feel so skittish. At this point I probably wouldn’t add to equities until I saw fresh highs. I think you’ll get a chance to buy them lower over the very near term so maybe be a bit more patient than usual (doesn’t mean I’m bearish big picture, let’s not get crazy). Anyway, let’s see what’s up today.
After the open we got an Overlook Hotel type bloodbath as Jack took a hatchet to the market. All 10 sectors in the S&P fell led lower by Tech and Financials. Just an ugly start as any hope of a rally got locked in the Freezer. Fortunately there was one big winner in Smith Field Foods. Shuanghui, China’s biggest pork producer, agreed to acquire the company for $4.72B ($34 per share). I guess all work and no bacon makes China a dull country? So wait, the Chinese are going to own all our Treasury Bonds and our tasty pork products? If they buy up Napa Valley I might lock myself in Room 237 with all the grapes. Quiet day though, super quiet. Honestly I can’t remember the last selling event that was hectic…maybe the Flash Crash? I know this will sound weird but when the market sells off it feels more like a lack of bids than a surge of offers. Buyers just kind of move to the sidelines and the vacuum pulls us lower. Anyway, by lunch we sat on 1,643 down about 1%.

The rest of the day saw a brief rally but ultimately a red close. Nothing crazy like a hallway full of blood so I won’t dramatize it too much. Winners were NEM, CME, JNPR, and CF. Losers CLF, HAS, KMB, and the homebuilders. Now clearly the market has hit a weird patch where it can’t decide what it wants to do. It happens, and there are some people that will call this kind of price action a good thing. You can work off overbought conditions with price or time and they will say that the market is doing the latter. I’m still concerned about intraday reversals and goofy headline moves so I think you sit on the sideline for now. The bull case is still intact, nothing I’ve seen lately leads me to believe that it’s time to dump stocks and run into a hedge maze. I think you temporarily bunker down and hope the crazy price action is temporary. If not let’s hope Scatman Crothers comes to save us (wait..he didn’t do so well did he) Final Score: Dow -69bps, S&P500 -70bps, Nasdaq -57bps, Rus2k -104bps.

News Highlights:

• Meeker is out with her latest slide show on Technology that you MUST read. Set aside 10-15 mins because she has a firm grasp on futures trends. Lots of trades in here too, check out slide 32. Oh and show your high schooler slide 88 before he chooses Russian literature as his major.
• This guy must’ve read Meeker because he’s definitely at the fore front of cashless.
• Deutsche put out a list of “2013 rally busters”. What are they? 1) Monetary policy shock 2) EZ debt crisis flare up 3) surprise US growth slowdown 4) China rough patch 5) Currency War Strikes 6) Geopolitcal pressure. Feels like we know about all these don’t we? If something is going to derail this rally it won’t come from a well-known list of worries.
• A nice infographic on renting vs owning from Merrill Lynch. Again, if you think that renting trend continues there’s great ways to play it.
• I was bored this afternoon and took a look at sector performance in May. What are the Top 3 performing sectors this month? Financials, Industrials, Energy. The top 3 worst? Utilities, Telecom, Consumer Staples. Defensives getting smacked. Bespoke noticed it too. Can you make a top when defensives underperform?
A blogger on Reuters tried to sum up whether there’s a credit bubble or not. “Total it all up: there’s an abundant amount of cheap debt on increasingly loose terms. But the unweighted average score of seven on the bubble-meter indicates credit markets aren’t yet showing the kind of excesses seen in the 2006/2007 boom. The bad news: it may not take long before they get there.”
• Stuff Michael should’ve invented #46
Funky collection of maps from Tumblr. How about that 4th IL congressional district? Who comes up with this stuff?
• Im a big @Disney fan, take my kids there a bunch, so this video warms my heart. It’s a small girl doing their Jedi academy training and deciding she likes the dark side better. Awesome. How can you not smile at this?
The best analyst in the world on housing: “Back in late 2008 and early 2009, I started reporting on small investor groups buying low end single family properties to rent. Since then rents have increased sharply and vacancy rates fallen. Early last year I checked back with these small investors, and they had all stopped buying. The numbers no longer made sense with all the large institutional buyers. Now it appears the numbers no longer make sense for at least one large buyer.”


We’ll end tonight with a golf trick video. You may have seen Tiger Woods do this a few times but my boy takes it to the next level. Crazy.

http://youtu.be/B83x_hWs6Xw

Have a good night.