Bull and Baird Blog - January 2, 2014

Equities start the day higher as another New Year descends upon us. Another chance for greatness, another chance to go to the gym for a week then give up, another chance to beat the VWAP or assault that benchmark, another chance to find love and happiness with family and friends. So let’s get to it shall we? There are two things I want you to pay attention to as we start fresh: Fund Flows and Dogs. First let’s talk about fund flows. As Bloomberg points out ETFs and Mutual funds took in about $162B last year, the most since 2000. If this market is going to continue to move higher it will need more and more fuel to be pumped from bonds to stocks, so we have to watch this data point like a hawk. Second, I want you to go dog hunting. I want you to comb thru the wreckage of 2013’s worst performing stocks because those are the ones with untapped potential. The top 5 worst performing stocks in the S&P last year were NEM, CLF, TDC, EW, and BTU. Two mining companies, a tech company, and health care company, and a coal company. Lots of disparate businesses that got shellacked in a huge year. Now that’s not the whole list but you get what I’m going for here. You know what two of the worst performing stocks in 2012 were? BBY and HPQ. BBY lost 47% and HPQ lost 42%. Ugly, people thought they were headed into the history books. How did they do in 2013? Up 257% and 108% respectively. Remember, you are buying the current expectations for the future of these businesses. So we want to find the stocks that everyone thinks can’t get worse, the one’s where sentiment is as bad as this weather. Plow thru those dogs, find the one’s people gave up because they couldn’t stomach the underperformance anymore. That’s as good plan as any for today and tomorrow right? Anyway, let’s see what the first trading day of the year brought.

After the open we spent the first half of the day grinding lower. Why? Because everyone expected a repeat of Jan 2, 2013. Newsletter writers are as bullish as they’ve been in 6 years and everyone thought we’d see a “hey it’s a new year, lemme put this 401k money to work” trade. Well that didn’t happen so we saw a pretty ugly selloff from the start. Let’s do a few predictions shall we? I love predictions and I haven’t got a chance to spread my wings yet. Prediction 1: wearable fitness technology explodes in 2014. Fitibit, FuelBand, Up, ThighChips, all of these “share how much you workout with your friends so you can really p*ss them off” gadgets are going to ramp up huge. I mean who doesn’t love a friend constantly telling them about a “great sweat” or a “long run”? Now they won’t even have to tell you, it’ll be tweeted to you daily! Yay! (I hate you all). Prediction 2: S&P will close somewhere between 2100-2125. $120 of S&P earnings with a 17.5x multiple for all of the following reasons: Yellen is Bernanke on steroids, US politicians get out of the way, the global recovery continues led by Europe, animal spirits romp with increased M&A, and investors continue to rotate from bonds to stocks. Prediction 3: Mobile Payments finally arrive. The proliferation of services like Square, Dwolla, and Bitcoin finally break the vice grip credit cards and cash have on the world. Prediction 4: Equity volumes finally have an up year. Concurrent with prediction 1 I think this chart may have finally bottomed as people come back to stocks. That chart is awful so let’s hope I’m right. Prediction 5: The Seahawks win the Super Bowl and Brazil wins the World Cup. Ok, I got that out of my system, let’s get back to markets. By lunch we sat on 1,831, down 90bps, but with very little client activity so let’s not overreact here.

The rest of the day brought no relief and we closed right where we were at lunch 1,831, down just shy of 1%. Look, we were overbought and no one is around to defend the dip, let’s not make a mountain out of a molehill % (BAC had a good day, that’s a solid tell). Once a few more decision makers return and inflows are deployed the market will find its footing again. So I have one resolution to offer in 2014, one that I am going to attempt and I hope you do too. Here it is: use your money to buy experiences and not things. An iPad or a car or a new dress are all interesting ways to spend money but ultimately leave us wanting more. It’s like eating candy, you are happy for a moment but it doesn’t really provide what your body needs. A family trip, or wandering through a foreign city, or going to see a concert all leave a far deeper impression on our soul than some material item. So let’s do more of those and agree to buy less things that inevitably end up in a closet or a drawer.

I’ll end today by wishing you good luck in the coming year. Collect the hopes and dreams of those you love and carry them with you wherever you go.

News Highlights:

  • Here’s a few names for you to go along with that thought process of “be contrarian”. S&P500 stocks with the largest % of buy-equivalent ratings (from Factset): AMT / DAL / COV / CELG / CAH / IP / PCLN / PWR
  • S&P500 stocks with the largest % of sell-equivalent ratings (from Factset): LXK / FII / PGR / DE / CLX / CHRW / ED / DO / CMA
  • Man I wish I was this good at multitasking
  • Signs of a bubble! Matt Hlavin, an entrepreneur in Cleveland who owns seven businesses, mostly in manufacturing, bought three Mercedes last year: a $237,000 SLS AMG and a $165,000 S63 AMG for himself, and a $97,000 GL550 sport utility vehicle for his wife. “I look at it as, I don’t have a boat,” Mr. Hlavin said. “I feel confident about the economy and about my business.”
  • Signs of no bubble! (see how hard this is?) U.S. investors are generally wary about stocks as a way for Americans to build wealth, as 37% say the stock market is an "excellent" or "good" way for average Americans to grow their assets, while 46% consider it "only fair," and 16% call it "poor." Does that stat blow your mind? 62% of people polled think the Stock market is “only fair” or a “poor” way to grow wealth. Wow.
  • Bill Mcbride making me feel good about being bullish: “Private residential construction is usually the largest category for construction spending, and is now the largest category once again. Usually private residential construction leads the economy, so this is a good sign going forward.”
  • Every single gym in America right now
  • Bothers me EVERY WINTER
  • Yes, yes I do want this
  • Great quote in a Josh Brown article: Allow yourself the uncomfortable luxury of changing your mind. Cultivate that capacity for “negative capability.” We live in a culture where one of the greatest social disgraces is not having an opinion, so we often form our “opinions” based on superficial impressions or the borrowed ideas of others, without investing the time and thought that cultivating true conviction necessitates. We then go around asserting these donned opinions and clinging to them as anchors to our own reality. It’s enormously disorienting to simply say, “I don’t know.” But it’s infinitely more rewarding to understand than to be right — even if that means changing your mind about a topic, an ideology, or, above all, yourself.
  • #14 and #15…my God so true
  • By the way, go buy this right now. Super fun game to play with couples.

I have two final links for you tonight, figured I’d give you a choice to kick off the New Year.