Bull and Baird Blog - May 21, 2014

Equities start the day higher as we bounce off yesterday’s quietly weak price action.   So I’ve spent the last month trying to come up with a new way to describe the stock market.   Can you believe that?  It took me a month…a MONTH to come up with something fresh.   That’s the worst writers block in history right?  Anyway, I am going to dub 2014 as the “Teenage Angst” Market.   Teenage angst you say?   That’s right, here’s why.  Next door to me lives a wonderful teenage girl that I’ve known from age 7.   She is currently a Junior in High School and exhibiting all the normal things you’d expect from a girl who is becoming a woman.  On the surface she is a calm, gentle, kind, beautiful expression of youth.  But under the surface rages a tempest of hormones and rebellion and conflict that frequently expresses itself in bursts of emotion at her parents.   This year our equity market is showing the exact same patterns as my friends daughter.  If you did a cursory glance at a newspaper (who does that anymore) equities looks ok:  the S&P is up 1.3%, most of Europe is higher, and if you own large like DIS or MRK or CL you are feeling pretty good about yourself.  But under the surface there is a hurricane of rotation, small cap butchery, bond market surging, and client confusion.   How can market trade sideways when momentum gets slaughtered?  How can the S&P be up 1% when small caps continue to occupy the woodshed?  How can bond yields continue to fall if stocks are the right place to be?  How can Oberyn possibly beat the Mountain (oh God please beat him).  Let’s ponder these mysteries over the next few days but right now let’s move on because this is supposed to be a daily market recap right?  (man I’ve been bad about that).

After the open we went nowhere fast.   Most of the gains came pre-mkt and by the end of the first 30 minutes we had settled into a sideways range.  Perhaps the most interesting thing about today was a group of Kindergarten kids who came by to see what we do.  You know what’s harder than describing what we do at a cocktail party?  Telling a 6yr old what you do for a living.  “Umm, yea, we help people invest their money and ummm try to beat the VWAP.  Want a donut”?  (I just tell people I’m an investment banker.  Shoot ‘em a fancy excel shortcut, they get all wide-eyed).   Anyway, lots of sideways price action on the highs.  Winners were NFLX, TJX, CBS, LO, and TIF.   Want a crazy factoid about TIF that I saw on twitter today?  A $10k engagement ring, bought in 1987 is probably worth 2k today. 10k invested in Tiffany stock in 1987, is worth 520k today. (HT @ivanhoff).   So there you go boys, tell your finance that you are thinking about the future as you drop that 1/4ct on her.  Losers were PETM, CRM, FTR, and HRL.  By lunch we sat on 1,883, up 60bps, waiting for Fed Minutes.

Which came and went to no big affair.   Lots of “policy normalization” talk that would put you to sleep if I attempted to describe it so I won’t.  The market broke out of its sideways malaise and when the bell rang we managed to settle on the high, 1,888, up 81bps.   So yesterday and today…two different days that featured no real news and opposite market reactions.  Like I said, there appears to be calm on the surface but underneath boils a witches cauldron.   You’d think the market was healthy with days like today but I just don’t know, too many odd things keep occurring that make me uneasy.  We may be near the highs but I’m cautious, I doubt I’d be adding to stocks right now.   Let’s talk about this more tmmrw.   Final Score:  Dow +97bps, S&P500 +81bps, Nasdaq +98bps, Rus2k +52bps.

Volume was low.  Our desk was better to buy.  Buying in Health care and Financials.  Selling in Industrials.  Shorting in not much.  News Highlights:
  • Is the S&P expensive?   It depends on how you look at it (the mother of all non-answers):  At a current level of 17.31, the trailing P/E ratio is nearly two points above its historical average (15.35: red line). While the market is 'expensive' compared to its long-term historical average, compared to short-term time frames, the market's valuation is more mixed. Over the last 25 years, the S&P 500's average P/E ratio (18.90) is more than 1.5 points above the current valuation, but compared to just the last decade the current P/E ratio for the S&P 500 is modestly above average (16.95).
  • Top notch Fed watcher here with some comments on what Dudley said yesterdayBottom Line: Dudley reinforces expectations that the low rate environment will persist long into the future. The data flow is not providing reason to think otherwise at this point; we would need to see higher inflation numbers coupled with real reason to believe labor market slack was rapidly evaporating, probably in the form of stronger wage growth. It remains interesting that the Fed does not view their own outlook as reason to accelerate the pace of activity. They seem relatively content to accept what they themselves acknowledge is an ongoing disappointment
  • And here’s a look at market breadth in May:   The current bearish breadth divergence between the rising index and fewer new highs, has actually been in progress for several months now (since October 2013) and is usually a warning signal of a possible market top  (yikes)
  • There are times when an ad can be so simple yet so brilliant.  This is one.
  • Its commencement speech time!   Here’s a good one from Admiral Mcraven, 10 Lessons to Change the World.  I like this thought:  “Be your very best in your darkest moments”
It’s been awhile so I have a huge backlog of Fail videos, let’s start dumping them on you!

http://youtu.be/Jo-xriqOPB4

Have a good night.