Bull and Baird Blog - January 7, 2014

Equities start the day higher after my Tauntaun freezes at the first marker. Seriously, I’m about to hit a 10c on the dollar bid for my home because living in the Midwest has become dangerous to my life. -50F with wind chill? Come on MAN. Yesterday was colder at O’hare than the South Pole, did the world flip upside down? Luckily there’s a lot of action in the stock market to heat things up. Wait…what’s that you say? The first 3 closes in the S&P were 1,831, 1,831, and 1,826? Ugh. And to make matters worse we haven’t had an up-close the entire year. Want another crazy stat? The S&P hasn’t had 4 down days to start the year since the last Ice Age. Thankfully it’s not…ummm.....where was I going with that? So why the quiet markets? Where’s all the steamy price action? I think two things are holding it back: earnings and momentum. Earnings kick off Thursday with AA so I imagine people aren’t keen to make a move before then. As for momentum it seems to have stalled out, people appear to be waiting for someone else to make the first move. In these type of “tread water” situations whatever the first big move is will be the near term path of the market. So keep your eyes open and stay warm. As for me I’m gonna cut this tauntaun open and jump inside because it can’t possibly be worse than my current situation. Polar Vortex? I may as well live on Mars.

After the open we got another market that was as exciting as watching people throw boiling water into cold air. That is to say it was boring, so for the love of God stop it. Even thought it was quiet we did manage to put together a decent morning rally. Why the sudden change of heart? A couple things 1) three days of sideways/down wouldn’t last forever. We scraped off the overbought conditions so it’s time to move on. 2) Another data point showing animal spirits howling: an Irish Bond Auction. In their first auction since leaving the International Bailout program Ireland received €14B in bids for €3.7B in bonds. Guinness for everyone! Honestly has anyone ever made money shorting the Irish? And even if they did would they want to keep it? God loves the Irish, he won’t let them fail (I still despise ND). I maintain that Europe will lead the global recovery in 2014 or at least provide dramatically increased support to the Worldwide picture. 3) The move in Financials. If you haven’t noticed banks have been the place to be for the first few trading sessions of 2014. BAC, C, and GS are just a few of the names that are breaking out. Is the market going to auger into the ground with financials pushing higher? I doubt it. Anyway, we finally saw green numbers out of the major indices and by lunch we sat on 1,838, up 63bps. Not bad, feels like this year started off tip toeing instead of bum rushing.

The back half saw a small dip but a rally to close right where we were at lunch, 1,838. Have you ever noticed how much I say that? We closed where we were at lunch? I may need to do a study here, feel like I write that a lot. So there you have it, the first up day of 2014! Cue the fireworks and music! Earnings and Friday’s Jobs report are your next two catalysts. As for that jobs report we are looking for good news, we are no longer in a “bad news is good because it means more Fed” market. We need 200k+ and less than a 7% rate for new highs. Bring it on because everything seems to be going sideways. Final Score: Dow +62bps, S&P500 +61bps, Nasdaq +88bps, Rus2k +99bps.

News Highlights:

  • Here, here is your homework assignment for the week. Comb thru the wreckage looking for the diamond that got thrown out
  • One of my predictions for 2014 was the arrival of mobile payments. Felix Salmon talks about how our payment system is extremely outdated: “The simple answer, as Karkal hints at, is that we’re suffering from a particularly toxic combination: an outdated payments system combined with a seemingly powerless central bank, which is happy to let the big banks dictate the pace of change (or lack thereof).” I think the time has come, I think there are multiple disrupters ready to change the game.
  • Want another textbook lesson in INEFFICIENT markets? Wander over to the chart of MDBX.
  • NFLX 5 tenets for hiring. These are good, managers take heed!
  • Fantastic article: Never mind the predictions: What did we learn? My favorite takeaway? “In 2013 we were reminded yet again that whatever “this” is, it too shall pass, and accommodating the latest crisis is not an excuse to upend an investing strategy.” Take that to heart, its meaning is immense.
  • Josh Brown reminds us that: “The combination of bond market refugees looking for bond-like equities along with the influx of flows into so-called “minimum-volatility” funds and ETFs led to an overvaluation in the high-dividend equity space, an excess that the market spent the majority of 2013 working off. The message is clear. Yield-chasing never ends well, regardless of whether it happens in stocks or bonds. It’s only ever a question of who’s left holding the bag at the inflection point.” If you feel like you are chasing yield step back and ask yourself if you are…
  • Things Michael should’ve invented for his wife #1
  • Good Santoli article on sentiment: Phil Pearlman, Yahoo Finance interactive editor and former hedge-fund trader (who also recently launched the Yahoo Finance reader sentiment poll), frames the current tactical moment nicely: “I am more interested in how sentiment responds to these extreme readings than the readings themselves. In May we got a 5% correction but that turned out to be the pause that refreshes. Sentiment turned more bearish quickly from those extreme bullish levels and I called this high-sentiment reactivity at the time. “My best guess is we get a pullback and the key will be how sentiment responds. If sentiment reactivity remains high and bearishness increases quickly, it implies we'll get a shallow correction that can be bought. If indicators continue to suggest complacency, perhaps we get a deeper correction and longer lasting.” This is important, let’s watch sentiment on the first pullback. In fact someone set an alarm to remind me.
  • Stares at for hours (in Aus)
  • Still doesn’t make it easier to stomach -35F
  • For my GoT crew. Show needs to come back soon, I’m dying for good TV now that Walking Dead stinks.

Well I spent a good amount of time looking for a funny video that had to do with cold weather. As I mentioned earlier all that exists are stupid people throwing water into the air. Sigh. Anyway I thought this was one was pretty good, give it a shot.

https://www.youtube.com/watch?v=HDP2QXmAOc4

Have a good night