Bull and Baird Blog - February 10, 2016

Equities start the day higher as I join the Dark side. I’ve always had a penchant for the dark side, it seems like it would be more fun to force choke a bunch of ewoks then be some celibate, meditating, calm dude with a ponytail in a temple. So yea, it’s a bear market. We can argue for days about the technical definition of a bear market but, like caring about the Presidential election, that’s a pointless waste of time.  The average stock in the S&P is down 25%+ from its highs. The Rus2k is in a bear market.   Energy / Banks / Materials are all in bear markets. The Nasdaq is a failed condo sale in Santa Clara away from a bear market and bonds act like this may be a gruesome bear market. So did I call the top?  Nope, sure didn’t. Some people did but they’ve been calling top for 4 straight years so I’m not sure we should induct them into the Prognosticating Hall of Fame just yet. So now what? If this is a bear market what’s the new plan? Well…I guess that would depend on your time frame / risk tolerance/penchant for volatility/thoughts about Central Banks/etc etc. That being said, there will be winners no matter what the tape looks like.   You know how Auto Zone (AZO) did from Oct 2007 to Mar 2009?? (peak to trough SPX move during the crisis) Up 21%. There will be winners and losers in our new world just like there always is but this is where we separate the pretenders from the contenders, those who simply benefit from a rising tide and those who provide true value. So gird your loins my friends because it’s time to embark on a new chapter in our lives:  Investing in a market that doesn’t just go up!

After the open it was all about Yellen and her testimony before Congress. We were hoping she’d say something like “we’re done with rate hikes for the foreseeable future” but instead we got “let’s not jump to any conclusions here people, it’s only been one month of turbulence.” I guess she has a point, if the Fed tried to soothe market jitters everytime we wobbled a bit they’d be having meetings three times a week. Hey here’s a great story, Burger King wants to sell hot dogs! The king of burgers, in its royal capacity, has decreed that the dogs of hot will be their new focus. Guys, this is huge, Burger King has been around for…oh…I don’t know…heck let’s call it 60 years and they’ve FINALLY found the hot dog!! Time to load up the family truckster for a trip to see the KING!!  Alright what else, the yield curve continued to flatten (bad sign), oil inventories dropped and it STILL couldn’t rally (ugh), DIS fell 3.5% as everyone continues to use it as a proxy for shorting the “sports / media industrial complex” (I’ll be reporting live from there in a week), and AKAM gained 21% because it beat earnings and its gone down every single day since October. Economic data today?  None, unless you want me to update you on the Monthly Budget statemenzzzzzzzzzz. By lunch the S&P had managed to eek out a 1% gain to 1,870 but it was nothing more than an oversold bounce. Get use to that term because you are going to hear it a lot, in the midst of a bear all rallies are vicious and vertical but ultimately represent nothing more than a pressure release valve. If we get back to 1,925 they are going to pound this thing like a carnival game.

The final hour saw the inevitable “there’s no reason for the S&P to be higher right now” selloff and by the time the bell rang it was all gone. Poof. So yes, I may be late to the party but I’ve moved into the bear camp. There is just too much going on to ignore the fact that the market acts like death. I mean take a look at this chart from MS, credit spreads are now at levels usually seen in a recession. When it comes to “levels of smartness” the bond market usually trumps all, including myself. Am I a doom and gloomer? No, I am definitely not in the apocalypse camp, this isn’t 2008. Are we going to have a recession? That I’m not so sure of, take a look in my news highlights for an article on this very topic. Anyway, sell the rallies, we aren’t heading back to 2,000 any time soon (you can quote me on this, facebook me on this, archive me on this. I mean I HOPE I’m ringing the bell at the bottom, believe me). 

Final Score:  Dow -62bps, S&P500 -2bps, Nasdaq +35bps, Rus2k -4bps.    

News Highlights: 

  • Succinct Summation of the Day’s Events: A bounce for no reason, got erased by the day’s end. Typical bear market action
  • Karl has some amazing advice for us all: “The story you hear almost every day goes something like this: Economists' forecasts for growth and/or inflation are never right. Especially the Fed's. Fund managers underperform their benchmarks. This is especially true of hedge funds. Wall Street analysts forecasts are always wrong. A conviction buy list should be shorted.  Retail investors are 'dumb money.' Journalists write cover stories about trends just as they are ending. We can summarize by saying that everyone is bad at this. No one is good at figuring out whether stocks or indices or economies are going higher or lower. Therefore, a suggestion: let's focus attention on ourselves and what we can do better. We can't change what others are doing but we can improve what we do.”
  • In the realm of “I’m sick of this topic” active vs passive is at the top of my list: “It’s a mark of how indexing has taken off that people are starting to ask me what would happen if everyone indexed. It makes for a fascinating discussion, but a purely academic one. It’s never going to happen.”
  • Q4 earnings haven’t exactly been gangbusters:   S&P 500 fourth-quarter earnings season is over 60% complete, yet earnings growth still remains deep in negative territory.The growth rate has only improved slightly in recent weeks, even as the bulk of companies released results.The current expectation is for a decline of 5.1% to $29.01. Growth is 47 basis points better than the estimate when earnings season kicked off in mid- January, but is just 19 basis points better than estimates at the start of January
  • Josh points to some LPL research about Bear markets without a recession. They have happened before: “Can you have a bear market for stocks without an accompanying recession? It’s not terribly common, but it does occur from time to time. Burt White, Chief Investment Officer at LPL, names three reasons why it’s happened in the past: Policy mistake (raising rates in 1976), financial crisis (Asian currency mess / LTCM blow-up in 2008) or excessive speculation (Crash of 1987).”
  • Stay in school kids
  • You think when the founders of Youtube sold to Google they were thinking “our website is full of content like this…..SOLD TO YOU SUCKERS”
  • Imagine hiking here!!!
  • So now that gas is cheap again
  • Well…..this author sees “No Signs of Capitulation” and I agree with him: “One day it started raining, and it didn’t quit for four months” Forrest Gump  What’s especially frustrating right now, besides the fact that the S&P 500 is now in a 13.2% drawdown, is that we’re not seeing any sense of panic. While every bounce attempt is getting smaller in both size and duration, the market has yet to do the proverbial flush that we all seam to be waiting for. The “all clear” moment, if you will.
  • The market and the economy have absolutely diverged but reflexivity is a thing…

I have 2 fail videos for you tonight and they are both short so WIN!

The first one is…well I don’t know what he was thinking

The second one is….well I don’t know what she was thinking.  See?  I’m an equal opportunity failist

Have a good night