Bull and Baird Blog - August 2, 2016

Equities start the day lower as the dog days of summer are upon us. I’m not sure what’s bumming me out more, the fact that the people around me are starting to talk football or that the S&P500 is locked into some kind of sideways “I don’t care” range. I mean how can we be talking about football already, it’s only August 2nd! Let’s not rush the summer shall we? We only get so many of these so let’s focus on lemonade and sunburns instead. Anyway, should we care that the market is in one of the tightest ranges in years? I’d argue no because that’s exactly what you want to see after a multiyear breakout. Up, up, and away only works for hot air balloons and paper airplanes, it usually doesn’t work for equity indices. Sideways gives everyone time to adjust to a new paradigm, it allows those who missed the recent move an opportunity to board the train or risk missing out on another new high. But Mike, what about earnings? Are they good or bad? Well my friends that’s a tough question because earnings season is more about “expectations” than reality. Are we beating expectations? Sure, I guess you could say that. 63% of the S&P500 reported and 71% beat EPS and 57% beat Revs (those Factset links are so good). EPS growth rates are still negative but Revenue growth rates are flirting with positive numbers! That being said, those are just numbers on a page, they really don’t tell the story of what we see day in and day out. People are still worried that the economy is slowing, people are still worried that central banks have lost control, people are still about European banks, people are still worried about oil, people are still worried that pumpkin spice lattes will be the only thing on the menu in 4 weeks. However, and this is the sweet juicy center, people being worried IS A GOOD THING. Heck Goldman just said sell stocks and Gundlach just said “sell everything.” I wonder…are those the kinds of things you see at a euphoric “tops”? I know that’s not a comprehensive look at sentiment but it is one piece of the puzzle. I don’t know, it’s still summer, let’s not make too much of price action when half the world is on a beach.

After the open stocks felt a bit like this. Actually they felt a lot like that as we slid lower on no real news. Economic data was OK, PCE was broadly inline and ISM NY flipped from 45.4 to 60.7 (imagine making any kind of decision based on regional Fed ISMs, they are more volatile than the Middle East). Bonds were lower as was the dollar and Crude so basically everything was being sold (maybe Gundlach is onto something here). Stocks seemed particularly weak though and we struggled to come up with an exact reason why. I guess a re-test of the 2,135 area is inevitable, plus, let’s face it, summer markets can act wonky given half the world is on a beach or hiking thru the woods (I did this last week, was refreshing for the soul). Winners were MNK, DNB, BIIB, CVS, and ABC. Losers were DAL, JWN, KSS, RCL, and M. By lunch we sat on 2,150, down 1%, as people turned to the old “growth concerns” panacea to explain the day’s price action. Gotta love that one right? Roll that puppy out anytime you want, freshness is guaranteed!

The rest of the day was the market trying not to go out on the lows which, fortunately for us, worked! 2,157, down 0.6%, which, honestly, felt like a win given how we traded all day. Can we chalk up today’s weakness to noise? Sure, I’ll allow it. We would need to break 2,135 to the downside for Bears to claim any kind of victory so let’s not start panicking just yet. Guess what…all these worries you read about on a daily basis are always with us. CS and Deutsche got you down? Has been so for months. You worried about 2% GDP? Join the club. Oil got you weak at the knees? It was at $28 in February. The Packers look better than the Bears? No comment. Wall of Worry my friends, it’s not the most overused catch phrase for no reason.

Final Score: Dow -49bps, S&P500 -64bps, Nasdaq -90bps, Rus2k -138bps.       

Volume was high. Our desk was better to buy. Buying in REITs and Health Care. Selling in Energy and Banks. Shorting in Autos and Banks. 

News Highlights: 

  • Succinct Summation of the Day’s events: Weakness most of the day due to oil or bonds or growth or banks or choose your own adventure. Small rally kept us from the gutter.
  • Seriously, I had just graduated college so I wouldn’t know, but was investing that easy back then? 7.5% just from bonds? “In 1995, a portfolio made up wholly of bonds would return 7.5% a year with a likelihood that returns could vary by about 6%, according to research by Callan Associates Inc., which advises large investors. To make a 7.5% return in 2015, Callan found, investors needed to spread money across risky assets, shrinking bonds to just 12% of the portfolio. Private equity and stocks needed to take up some three-quarters of the entire investment pool. But with the added risk, returns could vary by more than 17%.”
  • Speaking of bonds is the Yield Curve telling us anything here? “It’s also worth noting that the 2-10 spread isn’t exactly in the danger zone just yet. The average spread over this roughly forty year window is 0.96%. The latest reading is around 0.80%. Even though the gap is going in the wrong direction on the graph it still has a lot of room to narrow and flatten out even further. If this economic recovery has taught us anything, it’s that these cycles don’t always follow a set script in terms of magnitude or speed”.
  • Great quote from Seth Klarman (another of my favorite investors): "What can go wrong? How much can you lose? We don't think of risk in an academic sense of beta, which doesn't make any sense to us at all. Volatility's not risk, volatility is volatility. Volatility creates opportunities and isn't necessarily risk at all, unless you absolutely needed to sell the day that prices are really low. Rather, risk is the probability of losing and how much you can lose if you lose. So we focus on risk before we focus on return."
  • Nope, Nope, Nope. NEVER.
  • She’d beat me.
  • Guess what, you can stop flossing now! (like I ever did): “The majority of available studies fail to demonstrate that flossing is generally effective in plaque removal,” said one review conducted last year. Another 2015 review cites “inconsistent/weak evidence” for flossing and a “lack of efficacy.”
  • Wait…Pittsburgh is the best city to live in for beer lovers? Not Portland?
  • Lotta contrasts in China.
  • Cant imagine how someone learns to paint like this. I can’t even paint a blue sky.
  • Wait…so you regretted Ottilie? Really? I’m shocked. When it came to naming her newborn baby girl, Carri Kessler didn't hesitate. There was only one name she and her husband agreed on, and they both loved it: Ottilie. "No one could remember it and no one could pronounce it," Kessler says. "I was like, 'If you say it with a British accent, it sounds really good!' And people said, 'But you're from Maryland.'  She knew she was really in trouble six weeks later, when her grandmother revealed she still couldn't remember the name.

Ok tonight I am guaranteeing you one thing….GUARANTEEING. You will cry watching this man see his mom for the first time in years.  


Have a good night.