Bull and Baird Blog - April 7, 2014

Equities start the day lower as we continue to undergo some kind of goofy internal rotation. At one point growth stocks were as loved as Ned Stark, now they appear to be as hated as Joffrey Baratheon. Take a look at this colorful chart I whipped up this morning showing 5 growth names vs the S&P (normalized at 100). As you can see, the S&P has gone sideways since the beginning of March while former high flyers like Splunk and Fireeye and Yelp have thrown up all over themselves. My boy Dan Strumpf over at the WSJ pointed out that dividend stocks appear to be back in vogue here. The question we are all wondering is why….why have growth stocks turned into a trap for investors? My inclination is that the market is saying to us “I’m done paying up for growth at any price, I believe I will be able to find attractive returns in things like financials and old school large caps like MSFT instead.” Fortunately for us this rotation out of high flyers hasn’t affected major indices all that much. Even with 30 / 40 / 50% drawdowns from the highs we have a market that is +1% YTD (Nasdaq -1% YTD). That’s not bad, usually when high beta gets whacked it has bleed over effects everywhere and we just haven’t seen that yet. So as we enter another earnings season the primary concern on everyone’s minds is 1) will Joffrey finally die this season? 2) is the growth stock meltdown the start of something more serious? 3) is HBO’s new series Silicon Valley going to make me mad that I didn’t major in Computer Science? 4) has the bull market finally run out of steam? 5) will CNBC ever stop talking about HFT / rigged markets? and 6) did Michael really need 3 weeks off from writing recaps ? (yes)


After the open it was another ugly day where everything was bathed in red, kind of like the Hound in a KFC. No economic data or earnings so the tone was a follow thru from Friday. Names that haven’t touched their 200 days in YEARS not only touched them, but actually breached them (MA / V to name a few). I just find it weird that the market isn’t down way more than this. Just an ugly rotation, a bit like my jumpshot. You know what though? Unless you were chasing growth like mad for the past 6-12 months you probably don’t even care what’s going on right now. Names like IBM, MSFT, JPM, and DIS are all near their highs not giving a rip about 700x PE stock implosions. Anyway, the entire first half of the day was lower and by lunch we had landed on 1,848, down 0.9%. Winners: ALXN / HCP / VTR / K / INTC. Losers: TRIP / GNW / ADS / MU / KMX. Staples and Utilities led, Materials and Disc lagged. Exactly what you’d expect.


The afternoon saw the market pick itself up and dust itself off because it was WAY oversold but it wasn’t enough, a vicious final long sword slash closed us at 1,845, down 1%. So yea, growth stocks are basically a movie theater filled with 200 people, one exit, and a fire. That process is still playing out and no one knows what that’s going to do to overall risk appetites. It hasn’t affected them dramatically YET…but this selling could ramp up. Oh one final thing of note (thanks to my friend David): once earnings kick in companies go into their quiet periods for buybacks, which means we lose that underlying bid. Yikes.

Final Score: Dow -102bps, S&P500 -108bps, Nasdaq -1.1%, Rus2k -1.5%.

News Highlights:

 

  • Notes from the Value Investing Congress is our “must clicklink of the day. Lots of cool ideas in there.
  • QOTD from John Authers in the FT (so true): “From any given valuation, human nature being what it is, it is always possible for stocks to grow even more wildly cheap or expensive.” This quote probably answers the question “why are growth stocks selling off?” Why you ask? because human nature drove them to the wrong place..
  • Another look at the tech rotation taking place: “Watch how the high flyers and the more mature names trade this week. It might be revealing”.
  • Does anyone actually know what’s going on with our financial system? Cullen wonders: “But I guess that’s really what our financial system is. It’s this crazy construct of the human mind. And it’s always evolving and adapting with the times depending on how our minds perceive it, how we utilize it and how we alter its state in any given environment. And our limited minds are constantly trying to keep up with it all and understand the many different ways in which it impacts our world. It kind of makes one wonder – does anyone really know what’s going on?”
  • If you are afraid to fly, maybe don’t click this link. If you want to marvel at amazing landings, then definitely click it.
  • Andy Greenwald wrote an amazing recap of last night’s GoT episode. What a gift this guy has for writing, his grasp on language is just spectacular: “These are the sorts of oaths and codes that leave little room for fulfillment, let alone survival. In the moment, they can provide armor against the chaos of the world, but they soon reveal themselves as straitjackets. Not all games are worth playing.”
  • Nice chart here from Chanos on why he thinks we are in a bubble.
  • You wanna know why HFT exists? Really? Because exchanges need the money: “Around 40 percent of all U.S. stock trades, including almost all orders from "mom and pop" investors, now happen "off exchange," up from around 16 percent six years ago.” As long as “for profit” exchanges exist they will need to find revenue sources. This is one stream for them.
  • If this is a disease, I suffer from it HORRIBLY.

We’ll end tonight with a Jeb Corliss video. A guy hurtling thru space in between mountains set to a cool track. Just what the doctor ordered!

https://www.youtube.com/watch?v=8ige-atxPKI

Have a good night