Bull and Baird Blog - January 19, 2016

Equities start the day higher as we get another one of these “but it has to bounce right?” type of moves. You know what the most frustrating part of these selloffs is? What really grinds my gears? No, not the whole “losing money” thing, come on, I’m talking about the phone calls from family and friends, the one’s where they call or text you saying “what in the #$#$@#$ did you do to the market!” I love those so much, actually no I don’t love them, I detest them and not for the reason you think. Yes it stinks when someone you know loses money and they are frustrated over it but what people fail to grasp is this whole “equity risk premium” thing. It’s a fairly complicated term for the average person to understand but in the end you earn excess returns over, you know, cash, because STOCKS HAVE RISK. This little downdraft we are living thru, along with every other one in the history of markets, is how you earn that premium. Sitting here suffering at the hands of oil sellers and fidgety stock market participants is how $1 grows so much over your life. Yet the pain of watching your account slowly bleed overcomes people so much that they ignore that fact and call the one person they know in this industry to, well, complain about it. Yet when their account goes up 213% since 2009 they are nowhere to be found! Where’s the love? Where’s my free drinks when the S&P rises 28% in a year!! I don’t know, I’m partially venting here given the insanity lately but I have no other outlet than you fine people. By the way, have you ever seen more recession calls due to an 8% drop in the S&P than you have in the past two weeks?  Holy cow, not only is there a new one every single day but even level headed people have started to turn to the darkside. Take a look at this chart from MS noting big drops in SPX without a recession. Couldn’t this just be a garden variety correction?

After the open we saw horrible, gut wrenching price action…again. Same story different day.  An overnight bounce gets chipped away at all day until it finally relents under overwhelming selling pressure. Oil falls, then the Russell 2000 falls, then the Transports fall, then Credit spreads widen, then the S&P gives up the ghost. I wish I had better news for you but the entire first half of the day was a goat rodeo. What fell the most? Names like TWTR, SQ, GPRO, YELP, all the hot growthy tech stuff  is actually acting WORSE than energy names. Speaking of energy names we got more fresh lows there than temps in the Midwest over the past few days. CHK, ESV, COP, NFX, WLL, MRO, NBL heck I could just list the entire sector, all act puke-tastic.  Winners were VIAB, NFLX, M (einhorn likes it), HCN, and CPB.  So yea, a bit of media, a retailer with hedge fund backing, a REIT, and chicken noodle soup. Speaking of winners, our fantastic sales team in London did a little screen for what names are making RELATIVE highs compared to the S&P. Here’s a few of them for you to ponder: JNJ, T, KO, MCD, SBUX, KMB, ADBE, ACN, LMT. If you are looking for “leadership” or “what is working as the overall index shivers” those are a few of the names. By lunch we were headed lower faster than a German U Boat during the Battle of the Atlantic. DIVE DIVE  WHOOP WHOOP

The afternoon saw retest of the 1865 level and a hold! If there’s any silver lining to be found here it’s the fact that we’ve retested the August lows twice now and held both times! What would we need for the market to stabilize? I would think crude oil would have to trade sideways for about a WEEK or more plus transports and credit would have to show signs of stabilization.    Earnings, for now, don’t seem to matter because all we do is trade off the price of crude on an intraday basis. That has to break down, that correlation has to end and then MAYBE we can put the pieces back together.  Until then all you need is a Cl1 quote, that’s it. I want to wrap up today’s recap with a deep thought, something you will probably disagree with but here goes:   Hotel California is one of the most overrated songs ever to grace the airwaves. Glenn Frey, the world will miss you, you were a generational talent, but I hate that song so much. Overplayed doesn’t even begin to describe it, please just make it end.  Hotel California and Brown Eyed Girl need to go away forever (sorry Van M)  

Final Score:   Dow +18bps, S&P500 +5bps, Nasdq -26bps, Rus2k -128bps. 

News Highlights:

  • Succinct Summation of the Day’s Events: Overnight rally faded as crude oil found new lows. Same story different day.
  • PwC is out with their CEO survey and if there’s one takeaway here it’s that CEO’s REALLY worry about stuff…a lot. Like I guess all they do is worry?   Yikes.
  • Here’s a link that, well, tells you how you’ll die! Happy Tuesday everyone!
  • Crude oil can’t goto zero right? Maybe $1 but not zero? “Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it offered to pay $1.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a corrected list of prices posted on its website Monday. It had previously posted a price of -$0.50”
  • You know….you could just…
  • I don’t get fashion. Those would make nice oven mitts though
  • Bear markets typically don’t happen outside recessions, and some very level headed people don’t see one in 2016. “Bear markets rarely take place outside of an economic recession. In the post-World War II era, only two bear markets have occurred outside a recession. The first (1966) occurred amid rapidly rising interest rates. The second (1987) occurred after a euphoric 50% rise in equities over a 10-month period. For what it is worth, the current market and economic environment is nothing like either of these situations.  US equity markets could fall into a bear market now, and the US economy could fall into a recession in 2016. But there is scant evidence that the US faces an imminent recession (post and post) and bear markets outside of recessions have been rare, brought on either by rapidly rising interest rates or investor euphoria, neither of which is present at the moment.”
  • Howard Marks latest memo.  It sounds like he’s seeing some nice opptys in the stuff he traffics in! “Now, as discussed above, investors’ optimism has deflated a bit, some negativity has come into the equation, and prices have moved lower.  Depending importantly on which market we’re talking about and how it has fared in recent months, we consider it appropriate to move forward with a little less caution”
  • Ok…guess it’s time for a NY trip.
  • Three things that matter during a selloff. #3 is awesome: “The majority of the people taking victory laps for “calling” the market correction would have had you out of the market for the past 50-100% or so of gains (and they’ll never get you back in). Charlatans aren’t offering advice, they’re fear-mongering to draw attention to themselves. Do your best to ignore these attention-seekers and focus on utilizing sources of advice that seek to provide context and perspective.”
  • Is this another 2008? I say no, and so does Cullen. “That sounds pretty dead on to me. 2008 was such a unique event.  It doesn’t mean we can’t undergo a bear market.  In the last 100 years there have been 123 corrections (10%+ declines) and 32 official bear markets (20%+).  That means an official bear happens once every 3 years or so and corrections happen more than once a year.So, what we’re seeing really shouldn’t be that frightening at all.  And in my view, if this morphs into something really significant (like a 30%+ decline) then it would be largely irrational and a gift for those investors who have the tolerance to buy stocks at such attractive levels….”

Tonight we’ll end with a teenager doing teenage things.  Like being dumb…for no reason at all…


Have a good night