Bull and Baird Blog - February 18, 2014

Equities start the day higher as the market continues to twizzle all its participants. Twizzle has to be the word of this Olympics right? NBC announcers make every effort to say it nightly so we may as well run with it. So the Twizzle in Ice Dancing is when the pair, whose parents HAD TO have pushed them into this sport, spin themselves around with reckless abandon. What better metaphor is there for a market that started flat, crushed everyone for 6%, then came roaring back on nothing more than a few words from Yellen and some awful economic data? Earnings are almost over so let’s see what our trusted friends at Factset have to say about this quarter. So far we have a 72% EPS beat rate and a 66% revenue beat rate. Yeah...that really doesn’t tell us anything does it? Beat rates aren’t exactly full of valuable information. How about Q4 growth rates for the S&P, that might be a little more insightful for us. Well, the blended EPS growth rate stands at 8.5%, which is comfortably above the four quarter trailing avg of 3.8%. Ok, not bad, what about sales? The blended growth rate for revenues stands at 0.8%, which trails the four quarter avg of 2.2%. Hmmm, not so hot. But riddle me this Batman: how is this ANY different from every other earnings season we’ve seen lately? Companies crush it on EPS but sales aren’t exactly world beating. We hear that every single quarter and every single quarter the bears point to poor sales as a reason to sell stocks. So with 400 of the 500 companies having reported, this trader gives the Q4 earnings seasons a pass. Earnings, at this juncture, appear to be holding in there and are NOT a valid reason to sell stocks (yet...). Macro data on the other hand…

After the open we got more headscratching macro data. Empire manufacturing missed (4.48 vs 8.5) and the NAHB Housing index dropped from 56 last month to 46 this month. Seriously, 1 of 2 things has happened in the past few months. Either the US economy ground to a halt for NO REASON or all this weakness truly is weather related. The problem is we won’t know until the spring so all you can do is trade the tape in front of you (buy the dips). Speaking of the NAHB index, I noticed this comment from its Chairman: “Builders also have additional concerns about meeting ongoing and future demand due to a shortage of lots and labor.” Oh is that right? A shortage of LABOR? Isn’t that interesting. Is there any data to back up that claim? Let’s surf over to FRED shall we? What’s this…Construction Job openings are at a 5 year high? So the US economy ground to a halt huh? Please. Lots of single name stories to talk about so let’s do it. FRX got a buyout offer from Actavis (uncle Carl is just killing it), Candy Crush is going public (did you know they had 408 million users last month? TWTR only had 241 million. That’s a lot of crushing candy), Solar stocks are (to quote ruby rhod) HOT HOT HOT, and a report surfaced that AAPL held some kind of talks with TSLA last year. WHOA, are you kidding me? Can you imagine what kind of Marty Mcfly futuristic stuff that combo would’ve dropped on us? Call me crazy but if AAPL had bought TSLA I feel like the American auto industry would’ve been set for a century. Musk’s genius combined with AAPL’s incredibly elegant consumer experience? Are you kidding me, why did this not happen? Nooooooooooooo. Wait aren’t we supposed to talk stock market here? A quick morning selloff was once again gobbled up and by lunch we sat on 1,840, up 1 whole point. Dips continue to be chased by those who missed it, that’s the story of the past week or so.

The final hour brought nothing new, in fact we traded sideways from 11am ET to the close. So for all the consternation about our market this year we sit a hair from the all-time high. At this point you have to make a stand: Either you think the economy is rapidly slowing for a reason no one has explained to me yet or you think weather is impacting the data and it will smooth out by spring. That’s the dilemma you face, and it’s not an easy one. The answer is impossible to know until we are on the other side so you’ll have to trust your gut here. That being said the market is making its case that it’s transitory, how else can you explain this incredible price action? Another dip has been erased and everyone who didn’t buy it is kicking themselves (and likely chasing here). My opinion is that this horrendous, godawful, frozen wasteland that Elsa would LOVE to live in will disappear and once spring hits the animal spirits will bloom while watching Tiger choke away another major. Yea I went there. Final Score: Dow -15bps, S&P500 +12bps, Nasdaq +42bps, Rus2k +107bps (wow).

News Highlights:

  • Quote of the day is about love: “Instead, the evidence underscores an age-old adage: Don't marry for money; go where the rich people are and marry for love.” Ahh economists, such romantics.
  • An analyst at Citi tries to make the case that weather IS impacting the data: In his latest note to clients, Citigroup currency specialist Steven Englander produces this chart, which compares the change in non-farm payrolls (dark blue line) to the change in non-farm payrolls across 9 warm states that haven't been affected by weather much.
  • Bespoke puts out a list of “Triple Plays”, stocks that beat EPS, revs, and raised guidance. One of my fantastic salesman ran that list thru his price filter looking for names sitting at inflection points. Here are a few of the one’s that popped out: $AKAM $ADEP $CNQR $HW $NFLX $TDG $ONN $UBNT $TDG. One would hope these names, by nature of their recent earnings triple plays, still have gas in the tank as the year goes on.
  • What % of the American population could make it into this bed? 3%? Less?
  • This picture had incredible vibrancy
  • Josh talks about animal spirits here. “Americans ramped up their borrowing at the end of last year as their confidence improved, posting the largest increase in household debt since before the recession. In studying history, you will find few examples of this kind of thing stopping on a dime. Once animal spirits begin to manifest themselves, they tend to stick around until things get out of hand. This development is good news, don’t let anyone tell you otherwise – even if it portends a tighter Fed sooner than the consensus currently expects. That’s fine too.”
  • All SORTS of reasons why volume continues to die in this article, especially this fact: “data from the World Federation of Exchanges that showed at the end of last year 5,008 stocks traded on U.S. exchanges, down 44% from a peak of 8,884 in 1997.” There are a few problems facing our industry that cannot be solved by the sell side.
  • Remember 2011? How crazy Europe was? Guess what, Italian 10 yr yields are now BELOW where they were pre-crisis.

We’ll end tonight with people trying to tightrope walk between two hot air balloons. While they are in the air. Up high in the air. I mean are you kidding me.

https://www.youtube.com/watch?v=NWd8La170L4#t=1m45s

Have a good night.